The Federal Reserve sharply downgraded its economic outlook at its latest meeting only three weeks ago, minutes released on Wednesday revealed, challenging the view that green shoots of recovery are now plain to see.
While Fed policymakers took note of some news that was better than expected on housing and consumer spending, they appeared reluctant to put much weight on this. Most “viewed downside risks as predominating in the near term”.
Officials worried about “adverse feedback effects as reduced employment and production weighed on consumer spending” and a “weakening economy boosted the prospective losses of financial institutions, leading to a further tightening of credit ­conditions”.
The downgrade to the forecast led the Fed to announce that it would sharply increase its purchases of assets and would start buying Treasuries for the first time to try to support growth.
The minutes reveal disagreement within the Fed as to how robust the eventual recovery will be. Some officials “believed that the natural resilience of market forces would become evident later this year”. But others “saw recovery as delayed and weak”. Some worried that the crisis could ultimately lead to a reduction in the potential growth rate of the US economy.
While there has been better news since the March 18 meeting, the tenor of the Fed discussion suggests most policymakers will treat this data with scepticism.
Investors shrugged off the Fed’s assessment. The S&P 500 index dipped but closed back up nearly 1.2 per cent. The yield on 10-year Treasuries declined 6 basis points to 2.83 per cent.
Fed officials were concerned about the “degree and pervasiveness of the decline in foreign economic activity”. Policymakers “did not interpret the uptick in housing starts in February as the beginning of a new trend”, the minutes say.
Some policymakers noted “tentative signs of stabilisation in consumer spending in January and February”. But “others suggested that strains on household balance sheets from falling equity and house prices, reduced credit availability and the fear of unemployment could well lead to further increases in the savings rate that would damp consumption growth”.
While businesses were liquidating excess inventories, ratios of inventories to sales remained high. Given this, “participants anticipated further employment cutbacks . . . though perhaps at a gradually diminishing rate”.