The minutes of the Federal Open Market Committee's October 28-29, 2008 meeting were released November 19. As we already stated, Deflationary concerns are on the Fed's mind. What may be difficult for a traditionally oriented group of economists like the Federal Reserve Board is the fact that we are going to go through a Deflationary period regardless of what they do.
Below are a few excerpts from their meeting – because they do not number the paragraphs or otherwise make it easy to indicate where a quote came from I am leaving several paragraphs intact with the important lines bolded and italicized so you can go to the original and read through it yourself and easily see where these quotes came from.
You'll notice that the following is repeated in the report and thus shows up twice – is this their way of emphasizing their concern?
"Indeed, some saw a risk that over time inflation could fall below levels consistent with the Federal Reserve's dual objectives of price stability and maximum employment."
Many will agree that that line is a coded reference to Deflation. Indeed, one of the problems with a Deflationary economy is its persistence – it stagnates and slows everything down and then usually refuses to go away.
Housing, of course, has led the way as it deflates – expect other major sectors to be forced into the same mode. The point here is that an Internet based economy is deflationary as it overtakes a Debt based economy. Since we are now in deep into the early stages of an Internet Economy, this becomes a vital point in all business and personal financial planning.
Read the excerpts below. Go to the Federal Reserve Board site and read the minutes in their entirety.
In the forecast prepared for the meeting, the staff lowered its projection for economic activity in the second half of 2008 as well as in 2009 and 2010. Real GDP appeared to have declined in the third quarter, and the few available indicators that reflected conditions following the intensification of the financial market turmoil in mid-September pointed to another decline in the fourth quarter. The declines in stock-market wealth, low levels of consumer sentiment, weakened household balance sheets, and restrictive credit conditions were likely to hinder household spending over the near term. Business expenditures also probably would be held back by a weaker sales outlook and tighter credit conditions. The staff expected that real GDP would continue to contract somewhat in the first half of 2009 and then rise in the second half, with the result that real GDP would be about unchanged for the year. Although futures markets pointed to a lower trajectory for oil prices than at the time of the September meeting, real activity was expected to be restrained by further contraction in residential investment, reduced household wealth, continued tight credit conditions, and a deterioration of foreign economic performance. In 2010, real GDP growth was expected to pick up to near the rate of potential growth, as the restraints on household and business spending from the financial market tensions were anticipated to begin to ease and the contraction in the housing market to come to an end. With growth below its potential rate for an extended period, the unemployment rate was expected to rise significantly through early 2010. The staff reduced its forecast for both core and overall PCE inflation, as the disinflationary effects of the receding cost pressures of energy, materials, and import prices and of resource slack were expected to be greater than at the time of the September FOMC meeting. Core inflation was projected to slow considerably in 2009 and then to edge down further in 2010.
In their discussion of the economic situation and outlook, FOMC meeting participants indicated that the worsening financial situation, the slowdown in growth abroad, and incoming information on economic activity had led them to mark down significantly their outlook for growth. While economic activity had evidently already been slowing over the summer, the turmoil in recent weeks had apparently resulted in tighter financial conditions and greater uncertainty among businesses and households about economic prospects, further limiting their ability and willingness to make significant spending commitments. Recent measures of business and consumer sentiment had fallen to historical lows. Participants generally expected the economy to contract moderately in the second half of 2008 and the first half of 2009, and agreed that the downside risks to growth had increased. While some expected an improving financial situation to contribute to a recovery in growth by mid-2009, others judged that the period of economic weakness could persist for some time. Several participants indicated that they expected some fiscal stimulus in coming quarters, but they were uncertain about the extent and duration of the resulting support to economic activity. Participants agreed that in coming quarters inflation was likely to move down to levels consistent with price stability, reflecting the recent declines in the prices of energy and other commodities, the appreciation of the dollar, and the expected widening of margins of resource slack. Indeed, some saw a risk that over time inflation could fall below levels consistent with the Federal Reserve's dual objectives of price stability and maximum employment.
Participants indicated that the increase in financial turmoil had already had an impact on business decisions. Reports from contacts in many parts of the country suggested that the weaker and less certain economic outlook was leading businesses to cancel capital and other discretionary expenditures and lay off workers. Several participants noted that even businesses that had previously been largely unaffected by the financial turbulence were now experiencing difficulties obtaining new credit, and some businesses were said to be drawing down lines of credit preemptively rather than risk the lines becoming unavailable. Contacts indicated that fewer commercial real estate construction projects were being undertaken. Residential construction activity remained extremely subdued, with the stock of unsold homes still very elevated.
Meeting participants noted that real
consumer spending had been weakening through the summer, responding
to lower employment and tighter credit. Moreover, households, like
businesses, were reportedly reacting to the shifting economic
circumstances in recent weeks by cutting expenditures further.
Spending on consumer durables, such as automobiles, and
discretionary items had been particularly hard hit, and retailers
anticipated very weak holiday spending.
Just how much is a new car or dishwasher worth to a family that is about to be evicted or who are struggling to pay their utility bills?
Participants noted that the financial turmoil had increasingly become an international phenomenon, leading to a marked deterioration in global growth prospects. While advanced foreign economies had already shown signs of slowing, they had been significantly affected by the worsening of financial strains over the intermeeting period. Moreover, a number of emerging market economies, which had heretofore been less influenced by the financial developments in industrial countries, had in recent weeks been significantly affected, as the increasing strains in financial markets led global investors to pull back from exposures to such economies. As a result, interest rates on emerging market debt had shot up and prices of emerging market equity had dropped sharply. Participants saw the stronger dollar and weaker growth abroad as likely to restrain future growth in U.S. exports.
Participants agreed that inflation was likely to diminish materially in coming quarters. Commodity prices had fallen sharply, the dollar had strengthened notably, and considerable economic slack was anticipated. Moreover, some survey measures of inflation expectations had declined as had those derived from inflation-linked Treasury securities, although recent movements in the latter measures were likely influenced in part by increases in the premiums required to hold the relatively illiquid inflation-indexed securities. Some participants indicated that their business contacts had reported reduced pricing power and lower markups. Against this backdrop, participants generally expected inflation to decline to levels consistent with price stability. A few participants noted that disruptions to the credit intermediation process and the inefficiencies associated with shifts of resources among economic sectors could be expected to reduce aggregate supply as well as restrain aggregate demand; as a consequence, such factors could limit the effect of slower output growth on rates of resource slack and inflation. Others, though, saw a risk that if resource utilization remained weak for some time, inflation could fall below levels consistent with the Federal Reserve's dual mandate for promoting price stability and maximum employment, a development that would pose important policy challenges in light of the already-low level of the Committee's federal funds rate target.
In the discussion of monetary policy for the intermeeting period, Committee members agreed that significant easing in policy was warranted at this meeting in view of the marked deterioration in the economic outlook and anticipated reduction in inflation pressures. The recent substantial tightening in financial conditions, the sharp downshift in spending here and abroad, and the rapid abatement of upside inflation risks all suggested that a forceful policy response would be appropriate. Some members were concerned that the effectiveness of cuts in the target federal funds rate may have been diminished by the financial dislocations, suggesting that further policy action might have limited efficacy in promoting a recovery in economic growth. And some also noted that the Committee had limited room to lower its federal funds rate target further and should therefore consider moving slowly. However, others maintained that the possibility of reduced policy effectiveness and the limited scope for reducing the target further were reasons for a more aggressive policy adjustment; an easing of policy should contribute to a beneficial reduction in some borrowing costs, even if a given rate reduction currently would elicit a smaller effect than in more typical circumstances, and more aggressive easing should reduce the odds of a deflationary outcome. Members also saw the substantial downside risks to growth as supporting a relatively large policy move at this meeting, though even after today's 50 basis point action, the Committee judged that downside risks to growth would remain. Members anticipated that economic data over the upcoming intermeeting period would show significant weakness in economic activity, and some suggested that additional policy easing could well be appropriate at future meetings. In any event, the Committee agreed that it would take whatever steps were necessary to support the recovery of the economy.
Ironically, Representative John Dingell, who was just defeated by Representative Henry A. Waxman for the position of Chairman of the Committee on Energy and Commerce is married to a granddaughter of one of the Fisher brothers, who were the bodybuilding arm of General Motors. Fisher originally built horse drawn wagons and coaches but saw the coming automobile as the future. Rather than fight the advancement of the automobile, they began building bodies for them. Dingell is thought of in some circles as being cool to environmental issues and protecting the interests of the Detroit automakers. The value of that position is highly suspect if we ask how much further along would Detroit be if they had moved with environmental concerns rather than against them and were now building more efficient and green cars. General Motors and Ford facing total bankruptcy may be a clear lesson in helping us to understand the value of moving with major shifts rather than resisting them and complaining about how bad change is. The Fisher brothers understood the need to move with the trend. Now that we are going through this Collapse Event, will we go with it and plan and act accordingly, or will we fight it?
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