Fed Anticipates Further Economic Slowdown Next Year

Federal Reserve leaders expect economic conditions to sharply worsen next year, and stand ready to cut interest rates further to try to contain the damage, according to minutes of their last policymaking meeting released this afternoon.

The Federal Open Market Committee agreed at the end of October "that it would take whatever steps were necessary to support the recovery of the economy," according to minutes of the meeting, where the policymakers cut the short-term interest rate they control to 1 percent, from 1.5 percent. And "some suggested that additional policy easing could well be appropriate at future meetings."

That, combined with a miserable string of economic data and evidence that inflation is falling sharply, suggests that the central bank is inclined to cut rates again at its Dec. 16 policymaking meeting. Traders in financial markets think a half-point cut to 0.5 percent on that day is likely.

Along with the minutes, leaders of the central banks issued their projections for the economy over the coming years, which show the toll they expect the financial crisis to take on the broader economy. In June, the 17 top Fed officials (12 regional bank presidents and five Fed governors now in office) had projections of the unemployment rate at the end of 2009 that ranged from 5.2 to 6.1 percent.

That already looks too optimistic, as the rate in October was 6.5 percent. Now, the policymakers' projections for unemployment at the end of next year range from 6.6 percent to 8 percent.

The policymakers' projections for gross domestic product over the coming year range from a 1 percent contraction to 1.8 percent growth. Their projections call for relatively normal growth in 2010 and rapid growth in 2011.

As further confirmation that Fed leaders see inflation dropping, their projections for how much prices will rise in 2009 range from 1 percent to 2.2 percent, down from a 1.7 percent to 3 percent range they foresaw in June.