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FOMC Minutes Show Doubts About 2009 Recovery

FOMC participants are beginning to doubt the possibility of an economic turnaround in 2009, agreeing that the best case scenario would be for an extremely slow, and potentially delayed, turnaround starting late this year.

"Participants anticipated that a gradual recovery in US economic activity would begin during the third or fourth quarter of this year as the economy begins to respond to fiscal stimulus, relatively low energy prices, and continuing efforts to stabilize the financial sector and increase the availability of credit," according to minutes of the January 27-28 FOMC meeting released today.

This language adds a level of specificity not seen in past Fed projections of a recovery some time in the second half of the year, and is further clarified by language indicating real uncertainty about the coming quarters.

The minutes said participants were "quite uncertain about the outlook," and noted that many saw ongoing risks to the economy that could drastically delay the recovery.

"All but a few saw the risks to growth as tilted to the downside; in light of financial stresses and tight credit conditions, they saw a significant risk that the economic recovery would be both delayed and initially quite weak," the minutes said.

The minutes said these downside risks can be seen in a broad range of data.

For example, FOMC participants said they saw "no indication that the housing sector was beginning to stabilize." They said business investment was contracting, and said they "expected the rapid contraction to continue in coming quarters." They also said the ongoing fragility of the banking sector is another risk that could hamper growth.

The Federal Reserve headquarters in Washington, DC.
The Federal Reserve headquarters in Washington, DC.

FOMC participants offered these assessments along with a new, downwardly revised central tendency expectation of 0.5% to 1.3% drop in GDP this year, and unemployment in the range of 8.5% to 8.8%.

"The staff revised down its outlook for economic activity in the first half of 2009, as the implications of weaker-than-anticipated economic data releases more than offset an upward revision to the staff's assumption of the amount of forthcoming fiscal stimulus," the minutes said.

Elsewhere, the minutes said FOMC participants discussed the idea of setting a growth rate target for the money supply. A few FOMC members have floated this idea in recent remarks as a way of controlling inflation expectations now that the fed funds rate is effectively at zero.

But while "several" FOMC participants mentioned this idea in January, others were "skeptical" that setting a growth rate target for the monetary base or M2 would help, and some said the Fed's balance sheet needs to respond to economic realities rather than targets.

The minutes do not indicate that any conclusion was reached on this topic.

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