Fed: Severe downturn possible
Members of the Federal Reserve’s policy-setting committee worried at their most recent meeting that housing and financial market stress could trigger a nasty slide in the economy, even as inflation pushed higher, minutes of the meeting released on Tuesday show.
“Some believed that a prolonged and severe economic downturn could not be ruled out given the further restriction of credit availability and ongoing weakness in the housing market,” minutes of the March 18 meeting said.
Fed economists presented a somber picture of short-term prospects — central bank staff now fully expect negative growth over the first six months of the year — but held out the possibility of a modest rebound later.
“The staff projection showed a contraction of real GDP in the first half of 2008 followed by a slow rise in the second half,” the report said, referring to gross domestic product, a broad measure of a country’s output of goods and services.
At the same time, Fed officials found recent inflation reports “disappointing,” noting also with concern that some indicators of inflation expectations were edging higher credit reports.
HARD TO SET POLICY
Policy-makers said there were limits to what could be done through interest rate cuts to deal with problems underlying the housing and financial market turmoil, but agreed trimming borrowing costs might provide some help.
However, Fed officials said it would be hard to calibrate policy responses because their aggressive rate cuts in recent months would take some time to show their effect on economic activity.