US Fed Downgrades 2009 Growth Forecast, But Cites Signs of Improvement in Recent Data

The minutes of the April 28-29 FOMC meeting presented a modestly more upbeat assessment on the current state of the economy. Consumer spending activity was noted to have picked up and the housing market "remained depressed but seemed to have leveled off". Business spending and labour market conditions however continued to deteriorate.  The discussion highlighted an easing in credit market strains as evidenced by narrower bid-ask spreads in fixed income markets, improved conditions in funding markets, the rise in stock prices, and narrowing in spreads on corporate bonds. Despite these signs, credit growth remained stunted with weak loan growth to households and commercial credit contracting. 

While the tone of the discussion appeared to be lighter than at previous meetings, the bottom lineremained that the economyis in aweakened condition and the economic projections for 2009 and 2010 were actually revised lower. Any recovery was expected to be relatively restrained as the healing in credit markets would be gradual; households would remain cautious and work to rebuild savings and the impact of the fiscal stimulus would "diminish over time". Members saw signs that the pace of the economy's contraction started to slow in the second quarter and expect that the economy will begin to recover in the second half of 2009.

The unemployment rate forecast was increased in both 2009 and 2010 with the forecast range boosted by 1% to 1.2% in 2010. Both the all-items and core inflation rate forecasts were increased modestly in 2009 but were little changed for 2010.

The minutes indicate that the members thought that the previously announced amounts of the credit and quantitative easing programs were "appropriate" and deemed that these purchases "were providing financial stimulus" to the economy. While some acknowledged that an increase in the size of the programs "might well be warranted at some point" no change to the limits was suggested at the April meeting. The committee members unanimously agreed to wait and see the impact of the current program "before deciding whether to adjust the size or timing of asset purchases."