Cycle of low demand, job cuts worried Fed
The Federal Reserve’s decision last month to plow $1.2 trillion into the economy reflected growing concerns about a vicious economic cycle in which rising unemployment will curtail consumer spending, potentially into 2010.
Documents released Wednesday provided insights into the Fed’s decision to revive the economy by buying long-term government debt and boosting purchases of mortgage-backed securities from Fannie Mae and Freddie Mac. Projections for economic activity in the second half of 2009 and in 2010 "were revised down" by the Fed’s staff, who did not provide updated forecasts.
"Most participants viewed downside risks as predominating in the near term," according to minutes of the Fed’s closed-door meeting on March 17-18.
And with the economy likely to stay fragile, the unemployment rate — now at a quarter-century high of 8 totally free credit score.5 percent — will probably "rise more steeply into early next year before flattening out at a high level over the rest of the year," the minutes said.
The bleak outlook stems mainly from a cycle where rising joblessness prompted cutbacks by consumers, which in turn led to more layoffs and reduced production by businesses. Such forces would weaken the economy even more, triggering further credit tightening and additional losses at financial institutions.
The economy had deteriorated more than Fed policymakers expected from their previous meeting in January. Of particular concern was the sharp drop in demand overseas, which was hurting sales of U.S. exports, the Fed said.