Fed Pares Growth Forecast, Calls October Cut `Close' (Update4)

By Craig Torres and Scott Lanman


Nov. 20 (Bloomberg) -- Federal Reserve policy makers lowered their growth forecast in October and expressed concern about credit-market losses, even as they described the interest- rate cut as a ``close call.''

``Most members saw substantial downside risks to the economic outlook and judged that a rate reduction at this meeting would provide valuable additional insurance against an unexpectedly severe weakening in economic activity,'' according to minutes of the Federal Open Market Committee's Oct. 30-31 meeting. ``Many members noted that this policy decision was a close call.''

Records of the gathering, which buttressed speculation that the Fed will reduce borrowing costs again next month, were accompanied by estimates and phrases that highlighted risks to growth. The language contrasted with the October statement, which said the dangers of a slower expansion and faster inflation were ``roughly'' equal.

``This does not sound like a close call to us, more of a no-brainer,'' said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York. ``We can be pretty sure that if the outlook continues to deteriorate and markets remained distressed, they'll be easing again soon enough.''

Federal funds futures quoted on the Chicago Board of Trade at 5 p.m. in New York indicated an 82 percent chance of a quarter-point rate cut on Dec. 11, and 70 percent odds of a further move on Jan. 30.

Stocks Gain

Ten-year Treasury notes yielded 4.10 percent, from 4.07 percent late yesterday, while the dollar remained lower. Stocks rebounded from three-month lows, led by oil and technology companies. The Standard & Poor's 500 Index added 6.43, or 0.5 percent, to 1,439.70.

FOMC members predicted growth could slow next year to as low as 1.8 percent, according to the middle range of forecasts. The numbers are ``notably below'' the 2.5 percent to 2.75 percent anticipated in June, the Fed said.

Inflation, as measured by the personal consumption expenditures price index excluding food and energy, will be 1.7 percent to 1.9 percent, down from 1.75 percent to 2 percent.

``Most participants judged that the uncertainty attending their October projections for real gross domestic product growth was above typical levels seen in the past,'' the Fed said. ``In contrast, the uncertainty attached to participants' inflation projections was generally viewed as being broadly in line with past experience.''

Forecasting Overhaul

The projections, provided as an addendum to the minutes, are the product of a 1 1/2-year review of Fed communication that Chairman Ben S. Bernanke initiated to improve the public's understanding of policy makers' objectives.

The FOMC reduced the benchmark rate by a quarter-point on Oct. 31, to 4.5 percent, after a half-point move in September. Kansas City Federal Reserve Bank President Thomas Hoenig dissented, preferring no change. The minutes say Hoenig felt ``that policy needed to be slightly firm to better hold inflation in check.''

Fed officials have faced a challenge from financial markets on their neutral outlook for policy.

Traders are betting that year-end funding strains among banks and brokers will curtail lending and slow growth. Analysts predict that writedowns by banks and securities firms, already $50 billion worldwide, will continue to rise as losses mount on securities linked with subprime U.S. mortgages.

``Credit is shutting down to many sectors of the economy,'' said James Glassman, senior economist at JPMorgan Chase & Co. in New York. ``The Fed needs to adopt an accommodative stance.''

Financial Stability

The minutes contain several references to policy makers' concerns about financial stability, which they said could affect the outlook for growth.

``Participants generally viewed financial markets as still fragile and were concerned that an adverse shock -- such as a sharp deterioration in credit quality or disclosure of unusually large and unanticipated losses -- could further dent investor confidence and significantly increase the downside risks to the economy,'' the minutes said.

Yields on two-year Treasury notes touched 3.12 percent yesterday, the lowest since January 2005, as investors sought a haven in government debt.

The minutes showed that policy makers paying close attention to surveys and anecdotes that might indicate a turn in sentiment. Consumer spending should ``continue to advance at a moderate rate'' supported by income gains, the minutes said, while there was a risk that weaker home prices could ``further sap consumer confidence.''

Construction Slump

Fed officials have said they expect job growth, record exports and business spending will help sustain the expansion through the recession in housing. Government figures today showed no sign of a bottom for homebuilding, as residential construction permits slumped to their lowest level since 1993.

Bernanke told congressional lawmakers at a Nov. 8 hearing the Fed expected ``a more reasonable growth pace'' by the U.S. spring of next year. Fed Governor Randall Kroszner said Nov. 16 that data confirming a ``rough patch during the next year'' would not ``by themselves suggest to me that the current stance of monetary policy is inappropriate.''

Fed policy makers have sought to limit the risks to growth while preventing a jump in expectations for inflation. The central bank's preferred gauge of consumer prices, which excludes food and energy costs, rose 1.8 percent in September from a year ago. Officials are wary of any pass-through from soaring energy and commodity costs and a falling dollar.

``The easing of policy at this meeting seemed unlikely to affect adversely the outlook for inflation,'' the minutes said. ``A number of members noted that the recent policy moves could readily be reversed if circumstances evolved in a manner that would warrant such action.''