Fed Downgraded Forecasts, Signals Another Cut, Dollar Reverses Earlier Losses

FOMC minutes released today showed the committee members are extremely concerned with the deteriorating outlook in the US economy and the "the pace of economic activity appears to have slowed markedly. The minutes said that "Tight credit conditions, the ongoing housing contraction, and some slowing in export growth were likely to weigh on economic growth over the next few quarters." Indeed, the participants expected the US economy to "contract moderately in the second half of 2008 and the first half of 2009 and agreed that the downside risks to growth had increased.'' Members are also concerned with the possibility that inflation could fall below Fed's target and some felt that "more aggressive easing should reduce the odds of a deflationary outcome."

Also, the Fed has lowered forecasts for GDP, PCE and Core PCE and raised forecast for unemployment in 2008 and 2009. Here is a summary of the latest projections.

Markets expectation for further rate cut is affirmed by the minutes too as some committee members "suggested that additional policy easing could well be appropriate at future meetings,'' Also, "in any event, the Committee agreed to take whatever steps were necessary to support the recovery."

Dollar and yen reversed earlier losses and strengthen in general following another day of selloff in the stock markets. After sharp but brief pullback, USD/CHF resumes recent rally and surges to as high as 1.2145. USD/CAD finally takes out 1.2445 resistance and is set to retest recent high of 1.3015. Though, elsewhere, dollar and yen pairs are still bounded in established in spite of the volatility today. Crude oil and gold fail to sustain earlier rebound and settles back into established tight range.