Wednesday, May 21, 2008

The Fed Minutes Spook the Market

The Federal Reserve's April meeting minutes were released today. They believe that the threat of the credit crisis has dissipated.


Although participants anticipated that further improvement in market conditions would occur only slowly and that some backsliding was possible, the generally better state of financial markets had caused participants to mark down the odds that economic activity could be severely disrupted by a further substantial deterioration in the financial environment.


The TED spread has lessened in recent weeks to under 1%, the lowest it has been since July 2007.



However, compared to January, the Fed's forecast has changed considerably. The projections of the Federal Reserve Governors and Reserve Bank Presidents for real 2008 GDP growth now range from 0.0% to 1.5% (down from 1.0% to 2.2% in January). The projections for the Unemployment rates range from 5.3% to 6.0% (was 5.0% to 5.5%). The projections for PCE inflation ranges from 2.8% to 3.8% (was 2.0% to 2.8%). The Core PCE inflation projections range from 1.9% to 2.5% (was 1.9% to 2.3%).

Due to the improvement in the Financial markets and the threats of inflation, the Fed signaled that they are probably done with the rate cuts. The possibility of the rate cuts combined with the gloomy economic projections spooked the markets today.

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