observations on the fed minutes released yesterday, 4/8/08

it's been a while since we’ve seen such a negative sounding fomc. in the minutes from their most recent meeting, fed officials note soft labor demand, declines in industrial production, stalled real consumer spending, a continuing contraction in the real estate market, and a decline in fourth quarter GDPs in the major advanced foreign economies.

probably most concerning, however, is the admission that the fed’s “staff projection showed a contraction of real GDP in the first half of 2008….” moreover, even though the fed has repeatedly stated that they expect inflationary pressures to recede, they raised their forecast for core PCE in the first half of 2008 and that headline PCE would “substantially exceed” core PCE in 2008. we'll see if they know what they're talking about....

although the general consensus is that the economy will recover in the second half of this year as the result of more accommodative monetary policy and the fiscal stimulus package, the minutes mention that “uncertainty surrounded this forecast, and some participants expressed concern that falling house prices and stresses in financial markets could lead to a more severe and protracted downturn in activity than currently anticipated.”

moreover, meeting participants also noted that while the recent liquidity facilities the fed had introduced would help the credit market, the “strains were likely to raise the price and reduce the availability of credit to businesses and households.”

certainly, this is a gloomy document, but the question is: to what extent has the market already priced this in? none of this is news....