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Fed minutes reveal dismal outlook on 2008

The Federal Reserve's FOMC Minutes for the December 11 meeting were released today and bloggers and analysts have been enthusiastically commenting. Many have said there is nothing we didn't already know, to wit: economic growth is slowing, inflation is moderate but worsening, the housing market is weak and there is still trouble in credit markets.

I was struck, however, by the number of times the year 2009 was mentioned. It was as if the FOMC members had already written off 2008 as a lost cause and were looking forward to 2009. Note the following quotes forecasting a weak 2008.

  • "Real GDP was anticipated to increase at a rate noticeably below its potential in 2008."

  • "Conditions in financial markets... were expected to impose more restraint on residential construction as well as consumer and business spending in 2008 than previously expected. In addition, ..., higher oil prices and lower real income were expected to weigh on the pace of real activity throughout 2008 and 2009."

  • "By 2009, however, the staff projected that ... an improvement in mortgage credit availability would lead to a gradual recovery in the housing market. Accordingly, economic activity was expected to increase at its potential rate in 2009."

  • "The forecast for headline PCE inflation anticipated that retail energy prices would rise sharply in the first quarter of 2008 and that food price inflation would outpace core price inflation in the beginning of the year. As pressures from these sources lessened over the remainder of 2008 and in 2009, both core and headline price inflation were projected to edge down, and headline inflation was expected to moderate to a pace slightly below core inflation."

  • "... looking further ahead, participants continued to expect that, aided by an easing in the stance of monetary policy, economic growth would gradually recover as weakness in the housing sector abated and financial conditions improved, allowing the economy to expand at about its trend rate in 2009."

To me it sounds as if the Fed expects this year to be a washout and that the economy won't really get back on track until sometime in 2009. And don't even think about investing in the housing sector until the end of this year at the earliest.

Source: Minutes of the Federal Open Market Committee December 11, 2007

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