Although economic growth slowed in the fourth quarter of last year from the third quarter’s rapid clip, it seems nonetheless, as best we can tell, to have continued at a moderate pace.

Q4 GDP seen as ‘moderate’ – that is substantially better than initial expectations of several weeks ago.

Recently, however, incoming information has suggested that the baseline outlook for real activity in 2008 has worsened and the downside risks to growth have become more pronounced.

They initially said this for Q3 and for Q4.

Notably, the demand for housing seems to have weakened further, in part reflecting the ongoing problems in mortgage markets.

Maybe, but even if so, housing is now a much smaller influence on GDP.

In addition, a number of factors, including higher oil prices,

Yes, this slows consumer spending on other items, but oil producers have that extra income to spend, and if they continue to do so, GDP will hold up and exports will remain strong.

lower equity prices, and softening home values, seem likely to weigh on consumer spending as we move into 2008.

The fed has little if any evidence those last two things alter consumer spending.

Financial conditions continue to pose a downside risk to the outlook for growth.

Market participants still express considerable uncertainty about the appropriate valuation of complex financial assets and about the extent of additional losses that may be disclosed in the future. On the whole, despite improvements in some areas, the financial situation remains fragile, and many funding markets remain impaired. Adverse economic or financial news has the potential to increase financial strains and to lead to further constraints on the supply of credit to households and businesses.

Yes, his main concern is on the supply side of credit. With a floating fx/non convertible currency, there is a very low probability. Even Japan with all its financial sector problems was never credit constrained.

Debilitating credit supply constraints are byproducts of convertible currency/fixed fx regimes gone bad, like in the US in the 1930s, Mexico in 1994, Russia in 1998, and Argentina in 2001.

I expect that financial-market participants–and, of course, the Committee–will be paying particular attention to developments in the housing market, in part because of the potential for spillovers from housing to other sectors of the economy.

A second consequential risk to the growth outlook concerns the performance of the labor market. Last week’s report on labor-market conditions in December was disappointing, as it showed an increase of 0.3 percentage point in the unemployment rate and a decline in private payroll employment. Heretofore, the labor market has been a source of stability in the macroeconomic situation, with relatively steady gains in wage and salary income providing households the wherewithal to support moderate growth in real consumption spending. It would be a mistake to read too much into any one report.

Right, best to wait for the revisions. November was revised to a decent up number, and October was OK as well. And today’s claims numbers indicate not much changed in December.

However, should the labor market deteriorate, the risks to consumer spending would rise.

Yes, if..

Even as the outlook for real activity has weakened,

Yes, the outlook has always been weakening over the last six months, while the actual numbers subsequently come in better than expected. Seems outlooks are not proving reliable.

there have been some important developments on the inflation front. Most notably, the same increase in oil prices that may be a negative influence on growth is also lifting overall consumer prices and probably putting some upward pressure on core inflation measures as well.

Interesting that he mentions upward pressure on core – must be in their forecast. It took them a long time to get core to moderate, and even in August they did not cut as upward risks remained.

Last year, food prices also increased exceptionally rapidly by recent standards, further boosting overall consumer price inflation. Thus far, inflation expectations appear to have remained reasonably well anchored,

They have very little information on this. They only know when they become unglued, and then it is too late.

and pressures on resource utilization have diminished a bit. However, any tendency of inflation expectations to become unmoored or for the Fed’s inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and reduce the central bank’s policy flexibility to counter shortfalls in growth in the future.

Meaning once they go, it is too late.

Accordingly, in the months ahead we will be closely monitoring the inflation situation, particularly as regards inflation expectations.

The fed has no credibility here. Markets ignore this, and the financial press does not even report it.

Monetary policy has responded proactively to evolving conditions. As you know, the Committee cut its target for the federal funds rate by 50 basis points at its September meeting and by 25 basis points each at the October and December meetings. In total, therefore, we have brought the funds rate down by a percentage point from its level just before financial strains emerged. The Federal Reserve took these actions to help offset the restraint imposed by the tightening of credit conditions and the weakening of the housing market. However, in light of recent changes in the outlook for and the risks to growth, additional policy easing may well be necessary.

Reads a bit defensive to me.

The Committee will, of course, be carefully evaluating incoming information bearing on the economic outlook. Based on that evaluation, and consistent with our dual mandate, we stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.

Financial and economic conditions can change quickly. Consequently, the Committee must remain exceptionally alert and flexible, prepared to act in a decisive and timely manner and, in particular, to counter any adverse dynamics that might threaten economic or financial stability.

This was to come out at 1PM, instead it was released at noon.

This seems they meant to send a signal that they are ready to go 50.

It may take another 0.3% core CPI number, low claims numbers, and further tightening of the FF/LIBOR spread to get them to think twice about not cutting.

Their fixed fx paradigm supply side fears elevates their perception of the downside risks.


Leave a Reply