". . . given their forecasts for only a gradual upturn in economic activity and subdued inflation, members thought it most likely that the federal funds rate would need to be maintained at an exceptionally low level for an extended period."As for the tenuous underpinnings of recovery, the Committee cites (italics mine):
"Conditions in the labor market remained poor, and business contacts generally indicated that firms would be quite cautious in hiring when demand for their products picks up. Moreover, declines in employment and weakness in growth of labor compensation meant that income growth was sluggish. Also, households likely would continue to face unusually tight credit conditions. These factors, along with past declines in wealth that had been only partly offset by recent increases in equity prices, would weigh on consumer spending. . . . very substantial excess capacity in many sectors; this excess capacity, along with the tight credit conditions facing many firms, likely would mean further weakness in business fixed investment for a time."As for the upside, the FOMC offers (italics mine):
". . . less-aggressive inventory cutting and continuing monetary and fiscal policy stimulus could be expected to support growth in production during the second half of 2009 and into 2010. In addition, the outlook for foreign economies had improved somewhat, auguring well for U.S. exports. Participants expected the pace of recovery to pick up in 2010, but they expressed a range of views, and considerable uncertainty, about the likely strength of the upturn--particularly about the pace of projected gains in consumer spending and the extent to which credit conditions would normalize."I noted in previous posts how inventories are a weak reed on which to rest a growth forecast. We also know that export growth is a key to the recovery (watch for continued pressure to weaken the dollar against Asia), as to the impact of policy stimulus the FOMC offers this assessment --
"The improvement in financial markets was due, in part, to support from various government programs, and market functioning might deteriorate as those programs wind down. . . . All categories of bank lending had continued to decline. . . .
. . . fiscal policy helped support the stabilization in economic activity, in part by buoying household incomes and by preventing even larger cuts in state and local government spending. Participants generally anticipated that fiscal stimulus already in train would contribute to growth in economic activity during the second half of 2009 and into 2010 . ."There are also a few throw-aways in the Minutes regarding inflation risk -- after all the Fed needs to keep that group from steepening the curve too much. Disinflation is, as was noted in the Minutes, the greater risk.
In all, a sober assessment of what lies ahead. Thus far policy has only succeeded in slowing the decline. Without foreign growth and a weaker dollar there is no obvious demand driver to sustain economic expansion. It is going to be a long haul before the economy is up and growing, and that is what the Fed has let us know.