Rate Cut a 'Close Call'; GDP Growth Shrouded in Uncertainty - Fed Minutes

Includes: DIA, SPY
by: SA Eli Hoffmann

Minutes from last month's FOMC meeting released Tuesday indicate the Fed's decision to cut interest rates by 0.25% to 4.5% was a "close call." Ultimately, though, "most members saw substantial downside risks to the economic outlook and judged that a rate reduction at this meeting would provide valuable additional insurance against an unexpectedly severe weakening in economic activity." The minutes did note that the loosening "could readily be reversed" should circumstances warrant (full text).

The dissenting vote of Fed governor Thomas Hoenig, the minutes explained, was because he "saw the risks to both economic growth and inflation to be elevated and preferred to wait, watch, and be ready to act depending on how events developed."

The Fed sounded an encouraging note on consumer spending: "Available data suggested that consumer spending had been well maintained over the past several months and that spillovers from the strains in the housing market had apparently been quite limited to date." Some members noted, however, that consumer confidence indexes have recently declined, and "anecdotal reports" suggested a softening in retail sales in some areas.

Newly enhanced Fed forecasts, which now go out to 2010, indicated the Fed was more sure-footed in its inflation outlook than in its view of economic growth: Fed officials said growth would slow to 1.8%-2.5% in 2008, down from about 2.45% in 2007. The Fed sees 2.6% growth in 2009-10. Core inflation as measured by the PCE index is seen as remaining staedy at 1.7-1.9% over the period. However, the minutes noted, "most participants judged that the uncertainty attending their October projections for real (gross domestic product) growth was above typical levels seen in the past. In contrast, the uncertainty attached to participants' inflation projections was generally viewed as being broadly in line with past experience."

Equity markets continued down following the release; Treasury markets were higher.

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