FOMC members see increased downside risk to economic growth

There is nothing good about the U.S. economy and things may only get worse. At least that’s the sentiment permeating from the minutes of the Aug. 9 meeting of the Federal Open Market Committee. Minutes reveal discussions among the central bankers toggle between doom and gloom. The economic data the members weigh consistently “continued to be weak,” “remained depressed,” were “considerably slower than staff expected,” and “continued to trend lower.” And “many participants saw increased downside risks to the outlook for economic growth.” The minutes, released Tuesday by the Federal Reserve, also said “participants noted a deterioration in labor market conditions, slower household spending, a drop in consumer and business confidence, and continued weakness in the housing sector.” FOMC members discussed revised GDP data from the Bureau of Economic Analysis that showed the recession of 2008 to 2010 was deeper than previously thought and real GDP has yet to attain its pre-recession peak. Still, the central bank projects “real GDP to accelerate gradually over the next year and a half, supported by accommodative monetary policy, improved credit availability, and a pickup in consumer and business sentiment.” Although the unemployment rate is expected to remain elevated through the end of 2012. “Participants generally saw the degree of uncertainty surrounding the outlook for economic growth as having risen appreciably,” since the June meeting according to the minutes of the August meeting. “A couple noted that the cyclical impetus to economic expansion appeared to be weaker than it had been in past recoveries, but that the reasons for the weakness were unclear, contributing to greater uncertainty about the economic outlook.” Many participants also saw an increase in the downside risks to economic growth. While participants did not anticipate a downturn in economic activity, several noted that with the recovery still somewhat tentative, the economy was vulnerable to adverse shocks. FOMC members said the housing market remains depressed despite small gains in single-family housing starts in June, as sales of new and existing homes stay subdued and home prices continued to slide lower. New construction remained constrained by the overhang of foreclosed or distressed properties coupled with weak demand and tighter underwriting standards, according to the FOMC. Committee members expect “some rebound in economic activity in the near term as the Japan related supply chain disruptions in the motor vehicle sector ease.” Following its meeting in early August, the FOMC said it anticipates a sluggish economy will keep the federal funds rate at “exceptionally low” levels through at least the middle of 2013. Voting against the decisions with Richard Fisher, president of the Federal Reserve Bank of Dallas, Narayana Kocherlakota, head of the Federal Reserve Bank of Minneapolis and Charles Plosser, who head the Philly Fed. The men dissented because they wanted the FOMC to describe economic conditions “as likely to warrant exceptionally low levels for the federal funds rate for an ‘extended period,” rather than characterizing that period as at least through mid-2013,” according to the minutes of the meeting. The Wall Street Journal reported Tuesday that Kocherlakota doesn’t plan to dissent again. The FOMC meets again Sept. 20 and 21. Write to Jason Philyaw. Follow him on Twitter: @jrphilyaw

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