Minutes from the Federal Open Market Committee's March 17-18 meeting revealed the board has awoken to an economic outlook that is worse than originally thought.
Markets had been anticipating that the minutes would reveal a debate over the surprise decision to buy $300 billion in long-term Treasuries and billions in other toxic assets, but the minutes did not deliver.
The only revelation was that while a back-and-forth took place over whether it was better to buy extra mortgage-backed securities or long-term Treasuries, in the end, "several members noted that working across a range of assets and instruments was appropriate when the effects of any one tactic were uncertain."
The minutes noted that, "Such purchases would provide further monetary stimulus to help address the very weak economic outlook and reduce the risk that inflation could persist for a time below rates that best foster longer-term economic growth and price stability."
Some members did express concern about purchasing older, lower-quality assets.
The board said financial markets are still "very stressed" and that conditions since the last meeting in January had not changed.
Looking ahead, Fed members downgraded forecasts for GDP in the second half of 2009 and into 2010, adding that they expect GDP "to flatten out gradually over the second half of this year and then to expand slowly next year as the stresses in financial markets ease."
The forecasts for inflation were also downwardly revised, and members said inflation could fall "below desirable levels" in the months ahead. The Fed's unofficial target rate is 2.0%.
The board felt that unemployment would continue to climb through this year and into next year, before flattening out in 2010.
On a positive note, the minutes said the board felt U.S. consumer spending was holding up.
By Megan Ainscow and edited by Stephen Huebl
©CEP News Ltd. 2009