Federal Reserve Minutes of the September 18th FOMC Meeting

Highlights of the minutes

1) "Given the unusual nature of the current financial shock, participants regarded the outlook for economic activity as characterized by particularly high uncertainty."

2) The staff marked down its GDP forecast for 2008 and expected the curtailment of construction activity to last through the middle of next year. In addition, they also felt that consumer spending would be restrained in 2008. In 2009 the economy was expected to recover to a pace a bit above potential.

3) Participants "recognized that incoming data on core inflation continued to be favorable, and they generally were a little more confident that the decline in inflation earlier this year would be sustained. Inflation expectations seemed to be contained, and the less robust economic outlook implied somewhat less pressure on resources going forward."

It is important to note that, in the minutes, it was indicated that the Committee refrained from providing an explicit assessment of the balance of risks, for doing so could give the mistaken impression that the Committee was more certain about the outlook than they really were. This implies that it is still somewhat of an open-ended question as to whether or not further cuts are coming. On inflation, the participants were generally more confident that inflation pressures had moderated.

In fact, it was stated in the minutes that "it was no longer appropriate to indicate that a sustained moderation in inflation pressures had yet to be shown". Based on this statement, it seems likely that concerns about inflation wouldn't stop the policymakers from cutting rates again. Our own forecast calls for another 25 basis-points of easing in order to further promote stability in financial markets. However, towards the end of next year, as inflation re-emerges as the dominant concern, policymakers will reverse course and start to raise rates.

By: RBC Financial Group

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