Fed Minutes, Bank Rates, CONCERN

The Fed minutes for the meeting of the Federal Open Market Committee of the Federal Reserve System on December 15, 2008 and continued on to December 16, 2008 could be summed up as the Fed being concerned.  There was almost no part of the Feds review of the current state of affairs that was not depressing.  Even the comments on the normally welcome sign of reduced inflation had an interpretation regarding the concern of potential deflation and its damaging impact.

These are the minutes from the Fed meeting in which the Fed The Federal Open Market Committee decided to establish a target range for the federal funds rate of 0 to 1/4 percent.  These minutes provide a great deal of insight into why the economy is going deeper into a recession as well as why bank rates have and will continue to head lower.  Since the Fed meeting in December, CD rates have dropped measurably.  For the most part, there is little value in reading the summaries or a business writer’s opinion, simply read the minutes.  The Fed publishes these reports for everyone to read.  Most bank CD investors and savers are more knowledgeable about economic action than the average writer in the big city paper or even the Harvard boys on CNBC.

Regarding the deflation inflation issue, many business writers seemed to conclude that the Fed was overly worried about deflation.  Even in this morning papers there is comments on the Feds deflation fears.  The Fed did remark on the concerns of deflation however, these comments were rather subdued compared to the analysis of these comments by business writers.  The Fed account on inflation included these statements,

“Looking forward, participants agreed that inflationary pressures looked set to moderate further in coming quarters, reflecting recent declines in commodity prices and rising slack in resource markets, and several saw risks that inflation could drop for a time below rates they viewed as most consistent over time with the Federal Reserve’s dual mandate for maximum employment and price stability.

Those pressures were seen as likely to continue to abate because of the emergence of substantial slack in resource utilization and diminishing pricing power.  Participants were uncertain about the extent to which inflation would fall.  Some saw inflation leveling out near desired levels, while others expressed concern that inflation might decline below levels consistent with price stability in the medium term.

…indeed some members saw significant risks that inflation could decline and persist for a time at uncomfortably low levels.”

The vote encompassed approval of the statement below to be released at 2:15 p.m.
Meanwhile, inflationary pressures have diminished appreciably.  In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.

Hardly a reaction analogous to pulling the fire alarm.

Some of the other highlights of the minutes included the following,

The Committee’s statement noted that economic activity appeared to have slowed markedly, due importantly to a decline in consumer expenditures.  Business equipment spending and industrial production had weakened in recent months, and slowing economic activity in many foreign economies was damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil was likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.

The labor market continued to worsen.  New claims for unemployment insurance rose sharply through early December.  Conditions in the labor market deteriorated considerably in recent months as most major industry groups shed jobs.  Private payrolls continued to fall at a faster pace than earlier in the year… According to the November employment report, payroll employment fell at a rapid pace over the preceding three months, with substantial losses across a wide range of industry groups,

Industrial production…fell further in November, and consumer spending declined across a broad range of spending categories over recent months.  The housing market weakened again as construction activity, new home sales, and home prices declined further.  In the business sector, investment in equipment and software appeared to continue to contract.

The recent contraction in industrial output was broadly based.  The steep pace of decline in the production of consumer goods reflected not only cutbacks in motor vehicle assemblies but also drops in the output of other goods, such as appliances, furniture, and products related to home improvement.  The production of business equipment was held down by declines in the output of both industrial and high-tech equipment.  The output of construction supplies extended its decline after a brief pause in the middle of the year, and the contraction in the production of materials intensified.  In particular, steel production plummeted, and the output of organic chemicals contracted noticeably. For most major industry groups, factory utilization rates declined relative to their levels in July and remained below their long-run averages.  Available forward-looking indicators pointed to a significant downturn in manufacturing output in coming months.

Real personal consumption expenditures (PCE) fell for the fifth straight month in October, with the slowdown evident in nearly all broad spending categories.

Real construction activity continued to decline in November.  Single-family housing starts and permit issuance fell further. In the multifamily sector, starts dropped sharply in November while permit issuance remained on a downtrend.  Housing demand remained weak, and although the number of unsold new single-family homes continued to move lower, inventories remained elevated relative to the current pace of sales.  Sales of existing single-family homes changed little, although a drop in pending home sales in October pointed to further declines in the near term. 

Reflecting investor concerns about the conditions of financial institutions, spreads on credit default swaps for U.S. banks widened sharply, and those for insurance companies remained elevated.

In the summary was added –

All told, real GDP was expected to fall much more sharply in the first half of 2009 than previously anticipated, before slowly recovering over the remainder of the year as the stimulus from monetary and assumed fiscal policy actions gained traction and the turmoil in the financial system began to recede. Real GDP was projected to decline for 2009 as a whole and to rise at a pace slightly above the rate of potential growth in 2010. Amid the weaker outlook for economic activity over the next year, the unemployment rate was likely to rise significantly into 2010, to a level higher than projected at the time of the October 28-29 FOMC meeting.

Even sectors that had performed relatively well until recently, such as mining and drilling, were experiencing reduced activity, mostly due to the decline in commodity prices. Agricultural activity was also showing signs of weakness. Business sentiment had deteriorated sharply since September, likely contributing to steep drops in employment and production. Participants anticipated that, with the deteriorating economic outlook and tightening of credit conditions, capital expenditures were likely to be soft in coming quarters.

At the conclusion the Fed approved the following statement,

The focus of the Committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level.  As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant.  The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities.  Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses.  The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

The Federal Reserve had already adopted a series of programs that were providing liquidity support to a range of institutions and markets, and participants generally agreed that a continued focus on the quantity and the composition of Federal Reserve assets would be necessary and desirable.  Specifically, participants discussed the merits of purchasing large quantities of longer-term securities such as agency debt, agency mortgage-backed securities, and Treasury securities.  The available evidence indicated that such purchases would reduce yields on those instruments, and lower yields on those securities would tend to reduce borrowing costs for a range of private borrowers, although participants were uncertain as to the likely size of such effects.  Participants also generally believed that the special liquidity and lending facilities implemented or announced recently would support the availability of credit to businesses and households and thus help sustain economic activity.

The Fed is certainly concerned about our future.

Tags: bank rates, CD rates, fed

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