Rates May Be Slashed to 50-Year Lows, Fed Minutes Show

In its Oct 28-29 meeting the Federal Reserve made it clear that it could invoke a near zero interest rate policy (ZIRP) if the economic perspective continued to worsen. Rates below the current 1.0% have not been seen in 50 years.

The U.S. economy contracted -0.3% in the third quarter and may force Fed governors ⦥uro;œto further lower its target for the federal funds rate in the future⦥uro;? if output continues to plunge. ⦥uro;œSome suggested that additional policy easing could well be appropriate at future meetings,⦥uro;? according to Fed minutes from the latest meeting.

In the three weeks leading up to the meeting, the bank slashed rates 100bp. Despite such aggressive action, FOMC board members thought ⦥uro;œsubstantial downside risks⦥uro;? would remain. In June the reserve had forecast 2009 GDP growth to range between 2.0% and 2.8%. Developments over the last two months have led them to again cut their outlook for the following year. GDP growth is to range between -0.2% and 1.1% in the upcoming year, according to their estimates. As if that wasn⦥uro;™t enough, the contraction is expected to last through at least mid-2009.

Labor markets are also expected to continue deteriorating. Fed estimates call for a year-end unemployment rate of between 6.3% and 6.5%, an increase from the previous forecast of 5.5% and 5.7%

On inflation the Fed remained optimistic, stating that the rate of price increases would ⦥uro;œdiminish materially in coming quarters⦥uro;? to ⦥uro;œlevels consistent with price stability.⦥uro;? Wednesday⦥uro;™s Consumer Price Index release lent credence to their position as the metric shrank by -1.0%. Excluding food and energy from the mix, the metric shrank -0.1%, bringing the yearly core inflation rate to 2.2%. The rate of expected inflation declination is of some concern, however. ⦥uro;œSome saw a risk that over time inflation could fall below low levels consistent with the Federal Reserve⦥uro;™s dual mandate of price stability and maximum employment,⦥uro;? minutes showed.