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Wednesday, May 21, 2008

Fed Signals Rate Cuts Are Done, Lowers Growth Forecast for 2008

Today the Federal Reserve released the minutes from its last meeting. In these minutes they said cutting rates from 2.25% to 2.00% at the last meeting was a "close call" and they think future rate cuts are unlikely even if the economy contracts.

The FOMC also released their updates for GDP to rise between 0.3% to 1.2% this year. This is a reduction in their prior forecast of 1.3 to 2% GDP growth for 2008.
  • The staff projection pointed to a contraction of real GDP in the first half of 2008 followed by a modest rise in the second half of this year, aided in part by the fiscal stimulus package. The forecast showed real GDP expanding at a rate somewhat above its potential in 2009, reflecting the impetus from cumulative monetary policy easing, continued strength in net exports, a gradual lessening in financial market strains, and the waning drag from past increases in energy prices.
They also raised their forecasts for the unemployment rate, CPI or "headline inflation" and core inflation as measured the price index for personal consumption expenditures, or PCE, that Bob Brinker has discussed on his show.

For the short term, they expect inflation pressure from higher energy prices to continue:
  • The forecast of headline PCE inflation in 2008 was revised up in light of the further run-up in energy prices and somewhat higher food price inflation;
  • headline PCE inflation was expected to exceed core PCE price inflation by a considerable margin this year.
  • In view of the projected slack in resource utilization in 2009 and flattening out of oil and other commodity prices, both core and headline PCE price inflation were projected to drop back from their 2008 levels, in line with the staff's previous forecasts.
For 2010 they expect inflation as measured by the overall PCE to moderate.
  • On balance, participants expected the recent increases in oil and food prices to continue to boost overall consumer price inflation in the near term; thereafter, total inflation was projected to moderate, with all participants expecting total PCE inflation of between 1-1/2 percent and 2 percent by 2010.

From An Alternative To Bob Brinker's Inflation Outlook:

  • Bob Brinker: "We have always maintained that rising oil prices act as a tax on consumers, and are therefore counter-inflationary as they have a negative impact on consumer discretionary spending power." (No mention of core inflation)

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