Federal Reserve’s Comments On The Current (Dec 2007) State Of The US Economy

Federal Reserve policy-makers worried that a credit crunch could sharply brake economic growth and require big interest rate cuts, according to minutes of the Fed's December 11 2007 policy meeting.

“The Fed minutes showed policy-makers' growing concern that signs of economic softening coupled with credit market strains were a risk to the economic expansion. Fed staff revised down their estimate for growth in the final months of 2007, and projected the economy to expand at a rate "noticeably below its potential" in 2008. "Growth in late 2007 and during 2008 was likely to be somewhat more sluggish than participants had indicated in their October projections".

Some members noted the risk of an unfavorable feedback loop in which credit market conditions restrained economic growth further, leading to additional tightening of credit; such an adverse development could require a substantial further easing of policy.

At the same time, Fed officials realized that financial market conditions might improve more rapidly than they expected, which would make it appropriate to raise borrowing costs, reversing earlier cuts.

The Fed cut rates by a quarter-percentage point to 4.25 percent at the meeting. Boston Fed President Eric Rosengren dissented, preferring a more aggressive rate cut. Risks to growth had risen since their previous meeting in large part due to deteriorating credit markets. Even so, the policy-makers weighed the lagged impact of cumulative interest rate cuts, and a strong labor market, which suggested the economy retained some forward momentum.

Although members agreed that the stance of policy should be eased, they also recognized that that the situation was quite fluid and the economic outlook unusually uncertain.

The housing correction was likely to be deeper and more prolonged than anticipated, Officials also took note of a "marked deceleration" in consumer spending.

In the meantime, the U.S. economy still appears to be on shaky ground recession risks have risen in recent weeks.

Financial markets fully expect the Fed to cut interest rates by at least a quarter-percentage point at its next policy meeting January 29-30 2007 and a report on showed factory activity contracted in December 2007 led traders to increase bets on a half-point reduction.

In another worrisome sign, U.S. crude oil prices hit a record high of $100 a barrel.

Fed officials on December 11 2007 saw inflation readings as less favorable than they had been in the past, but anticipated an easing of core inflation, which strips out food and energy.