Source: Bloomberg.com

Federal Reserve policy makers saw “substantial” risks to the slumping economy last month as they cut the benchmark interest rate to a record low and pledged to expand emergency loans if necessary.

Central bank officials believed “the economic outlook would remain weak for a time and the downside risks to economic activity would be substantial,” according to the minutes of the Dec. 15-16 Federal Open Market Committee meeting released today in Washington. The FOMC discussed setting an inflation target to discourage expectations that price increases will slow “below desired levels.”

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“The current downturn is likely to be far longer and deeper than the ‘garden-variety’ recession,” Federal Reserve Bank of San Francisco President Janet Yellen said in a Jan. 4 speech. “It’s worth pulling out all the stops” in a fiscal stimulus.

U.S. employment fell by 500,000 jobs in December, bringing last year’s decline to 2.4 million, the most since 1945, according to the median estimate of economists surveyed by Bloomberg News ahead of Labor Department figures due Jan. 9.

Some Fed policy makers said last month that “during the period of financial turmoil” the central bank’s “balance sheet would need to be maintained at a high level,” according to the minutes. Some officials saw “the distinct possibility of a prolonged contraction” stemming partly from stresses in financial markets.

The FOMC discussed setting a target for growth in the Fed’s balance sheet as a guide to policy, the minutes said. While a “few” policy makers favored a numerical goal, most favored “close cooperation and consultation” with the Fed board.

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Technorati Tags: Federal Reserve, Federal Open Market Committee

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