Is the Fed bullish or bearish about the economy? Let’s go to the Minutes:
The staff’s projections for economic activity in the second half of 2009 and in 2010 were revised up, with real GDP expected to edge higher in the second half and then increase moderately next year. The key factors expected to drive the acceleration in activity were the boost to spending from fiscal stimulus, the bottoming out of the housing market, a turn in the inventory cycle from liquidation to modest accumulation, and ongoing gradual recovery of financial markets… Looking out to 2011, the staff anticipated that financial markets and institutions would continue to recuperate, monetary policy would remain stimulative, fiscal stimulus would be fading, and inflation expectations would be relatively well anchored. Under such conditions, the staff projected that real GDP would expand at a rate well above that of its potential, that the unemployment rate would decline significantly, and that overall and core PCE inflation would stay in a low range.
Sounds like the Fed’s bullish!
Although the near-term economic outlook had improved modestly since March, participants emphasised the tentative nature of the incoming data, which are volatile and subject to revision. The experience of previous recessions underscored the challenges of identifying the onset of economic recovery using real-time indicators. Also, empirical analysis of past episodes in the United States and abroad in which economic downturns had been triggered by financial crises generally concluded that such contractions tended to be more severe and protracted than other recessions.
Moreover, participants continued to see significant downside risks to the economic outlook. In particular, while financial strains and risk spreads had lessened somewhat over the intermeeting period, participants agreed that the global financial system remained vulnerable to further shocks… Some participants also referred to mounting losses in commercial real estate, which could have substantial adverse consequences for regional banks and other financial institutions with significant concentrations of such assets.
Looking further ahead, participants considered a number of factors that would be likely to restrain the pace of economic recovery over the medium term. Strains in credit markets were expected to recede only gradually as financial institutions continued to rebuild their capital and remained cautious in their approach to asset-liability management, especially given that the outlook for credit performance was likely to improve slowly.
Some sectors–such as financial services and residential construction–might well account for a smaller share of the economy in coming years, and the resulting reallocation of labour across sectors could weigh on labour markets for some time. Households would likely remain cautious, and their desired saving rates would be relatively high over the extended period that would be required to bring their stock of wealth back up to more normal levels relative to income. The stimulus from fiscal policy was expected to diminish over time as the government budget moved to a sustainable path. Demand for U.S. exports would also take time to revive, reflecting the gradual recovery of major trading partners.
Most participants expected inflation to remain subdued over the next few years, and they saw some risk that elevated unemployment and low capacity utilization could cause inflation to remain persistently below the rates that they judged as most consistent with sustainable economic growth and price stability. Nonetheless, recent monthly readings on consumer price inflation had been above the low rates observed late last year, and survey measures of longer-run inflation expectations had remained reasonably stable, leading many participants to judge that the risk of a protracted period of deflation had diminished. Some participants highlighted the potential pitfalls of making inflation projections based on contemporaneously available measures of resource slack, especially during periods when the economy was facing large supply shocks and significant sectoral reallocation. Several participants referred to contacts who had expressed concerns that the expansion of the Federal Reserve’s balance sheet might not be reversed in a sufficiently timely manner and hence that inflation could rise above rates consistent with price stability.
Glad we got that clear.
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