Yesterday’s publication of the minutes of the Federal Open Market Committee meeting held on March 17-18 reveals a downbeat short-term outlook for the American economy.
As well as revising down its projections for real GDP growth in the second half of 2009 and 2010, most participants viewed downside risks as predominating in the short-term. The minutes said this was “mainly owing to potential adverse feedback effects, as reduced unemployment and production weighed on consumer spending and investment”.
Participants did not interpret the rise in housing starts in February as the start of a new trend, “but some noted that there was only limited scope for housing activity to fall further”.
In addition while several participants noted the “tentative signs of stabilisation in consumer spending in January and February … others suggested that strains on household balance sheets from falling equity and house prices, reduced credit availability, and the fear of unemployment could well lead to further increases in the saving rate that would damp consumption growth in the near term.”
With this in mind, participants expressed a variety of views on the strength and timing of the recovery. Some thought the natural resilience of market forces would became evident later this year. Others saw a recovery as being delayed and potentially weak because of a possible rise in the savings rate and a slow improvement in financial conditions.
“Many viewed the strengthening of the banking system as essential for a sustained and robust recovery,” said the minutes.
As a result, while the committee members decided to keep the federal funds rate at zero to 0.25%, members agreed to undertake additional purchases of up to $750 billion (£512 billion) of mortgage-backed securities and a further $300 billion to buy long-term government bonds.