The Fed Doesn't Understand the Powerful Impact of Their Own Money Printing

The Fed is much more pessimistic in their recent FOMC minutes, than they need to be. The Fed projects GDP to decline in 2009 "as a whole", and unemployment to "rise significantly into 2010". The Fed also expects disinflationary pressures to continue into 2010.

From the just released FOMC minutes:

In the forecast prepared for the meeting, the staff revised down sharply its outlook for economic activity in 2009 but continued to project a moderate recovery in 2010. Real GDP appeared likely to decline substantially in the fourth quarter of 2008 as conditions in the labor market deteriorated more steeply than previously anticipated; the decline in industrial production intensified; consumer and business spending appeared to weaken; and financial conditions, on balance, continued to tighten. Rising unemployment, the declines in stock market wealth, low levels of consumer sentiment, weakened household balance sheets, and restrictive credit conditions were likely to continue to hinder household spending over the near term. Home building was expected to contract further. Business expenditures were also likely to be held back by a weaker sales outlook and tighter credit conditions. Oil prices, which dropped significantly during the intermeeting period, were assumed to rise over the next two years in line with the path indicated by futures market prices, but to remain below the levels of October 2008. All told, real GDP was expected to fall much more sharply in the first half of 2009 than previously anticipated, before slowly recovering over the remainder of the year as the stimulus from monetary and assumed fiscal policy actions gained traction and the turmoil in the financial system began to recede. Real GDP was projected to decline for 2009 as a whole and to rise at a pace slightly above the rate of potential growth in 2010. Amid the weaker outlook for economic activity over the next year, the unemployment rate was likely to rise significantly into 2010, to a level higher than projected at the time of the October 28-29 FOMC meeting. The disinflationary effects of increased slack in resource utilization, diminished pressures from energy and materials prices, declines in import prices, and further moderate reductions in inflation expectations caused the staff to reduce its forecast for both core and overall PCE inflation. Core inflation was projected to slow considerably in 2009 and then to edge down further in 2010.

What's really going to happen:

Because the Fed fears a deep, deep recession, they will print and print more money. This means that the recession will be over much earlier than they foresee, sometime before the end of 2Q 2009. Inflation, not deflation, will be a major problem in 2010.

It's Official: U.S. Economy In Recession

The National Bureau of Economic Research today said that the United States economy has been in recession since December 2007, when economic activity peaked.

Fed Sees Recession Lasting Through First Half of 2009

You have to take this news out of the Fed with a ton of salt, since they didn't see the recession or the housing crisis coming, despite the fact that they caused it by their money supply manipulations.

That said, according to minutes of the closed-door meeting of the Federal Open Market Committee on Oct. 28 and 29. The Fed governors and Fed bank presidents "generally expected the 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."

For a group that hasn't done too well on the forecast front, they do get into some detailed forecasts. The minutes, for example, also report that "Participants agreed that inflation was likely to diminish materially in coming quarters."

Given that the Fed is now printing money again, and that it will only take a lessening of the desire to hold cash balances that will re-ignite inflation, the Fed's expectations that inflation is likely to diminish materially is a very bold statement, and has a good chance of proving very wrong by mid-2009.

Europe and Japan Officially in Recessions

From The Independent: It's official: eurozone collapses into its first recession:

Europe's economy officially collapsed into recession for the first time since its inception during the third quarter ... The eurozone, made up of the 15 countries that use the euro as their primary currency, shrank by 0.2 percentage points between July and the end of September, having contracted by the same margin during the preceding three months as well. ...

Germany and Italy, the continent's largest and fourth largest economies, dragged the eurozone down – both slipped into recession during the third quarter. Spain also suffered its first quarter of negative growth in 15 years. However, France just managed to maintain a positive growth rate.

From Bloomberg: Japan's Economy Shrinks 0.4%, Confirming Recession:

Japan's economy, the world's second largest, contracted more than economists expected in the third quarter, confirming it entered its first recession since 2001 as companies cut back spending.

Gross domestic product fell an annualized 0.4 percent in the three months ended Sept. 30 ...

The United States has not yet been officially declared in recession, Jeffrey Frankel who directs the program in International Finance and Macroeconomics at the National Bureau of Economic Research, where he is also a member of the Business Cycle Dating Committee, says:

The weight of evidence is now overwhelming: We are currently in recession.