The minutes from the March 18th Fed meeting indicate that the FOMC members saw additional downside risks in the economy. It was this concern that prompted the Fed to initiate a $300 Billion program of “quantitative easing” in which the Federal Reserve committed to purchasing government bonds on the open market over the next six months.
The minutes stated, "participants expressed concern about downside risks to an outlook for activity that was already weak" and cited “fragile and unsettled” financial markets and a sharp drop in global economic activity.
The concern appears to be the impact of increasing unemployment and reduced production on consumer spending. The fear is that fear of the future would lead to further tightening in the credit market. Thus, the Fed countered with an even more aggressive approach to easing interest rates.
There were a wide variety of views presented on the issues of the strength and the timing of the economic recovery. Some felt that the recovery would be evident later this year, while others saw recovery being delayed and potentially much weaker than generally accepted.
Despite the gloomy picture of the economy painted by the minutes, some recent reports, particularly related to consumer spending, durable goods, and housing sales, came in surprisingly strong in January and February.
Fed officials noted "tentative signs of stabilization" in spending. However, others worried that the falling wealth effect and unemployment fears would drive the U.S. savings rate higher. The fear here is that savings could replace consumption.
Stocks moved lower in response to the report as investors worried that the second half recovery that most analysts have accepted, may be in jeopardy.
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