The information reviewed at the December meeting pointed to a significant contraction in economic activity in the fourth quarter. Conditions in the labor market deteriorated considerably in recent months as most major industry groups shed jobs. Private payrolls continued to fall at a faster pace than earlier in the year, and the unemployment rate rose to 6.7 percent. Industrial production, excluding special hurricane- and strike-related effects, fell further in November, and consumer spending declined across a broad range of spending categories over recent months. The housing market weakened again as construction activity, new home sales, and home prices declined further. In the business sector, investment in equipment and software appeared to continue to contract. Financial markets saw a further pullback in risk-taking, spurred in part by the more pessimistic outlook for economic activity; this situation led to lower equity prices, higher risk spreads, and tighter constraints in credit markets, all of which intensified the decline in real activity. On the inflation front, headline consumer prices declined in recent months, as energy prices continued to fall and consumer food price increases moderated... Conditions in short-term funding markets remained strained for most of the intermeeting period, though some signs of improvement were evident... 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. 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... In the discussion of monetary policy for the intermeeting period, Committee members recognized that the large volume of excess reserves had already resulted in federal funds rates significantly below the target federal funds rate and the interest rate on excess reserves. They agreed that maintaining a low level of short-term interest rates and relying on the use of balance sheet policies and communications about monetary policy would be effective and appropriate in light of the sharp deterioration of the economic outlook and the appreciable easing of inflationary pressures. Maintaining that level of the federal funds rate implied a substantial further reduction in the target federal funds rate. Even with the additional use of nontraditional policies, the economic outlook would remain weak for a time and the downside risks to economic activity would be substantial. Moreover, inflation would continue to fall, reflecting both the drop in commodity prices that had already occurred and the buildup of economic slack; indeed some members saw significant risks that inflation could decline and persist for a time at uncomfortably low levels... In addition to the already announced asset purchases and liquidity programs, members concurred that the statement should indicate that the Committee stands ready to expand purchases of agency debt and agency mortgage-backed securities, and that it is evaluating the potential benefits of purchasing longer-term Treasury securities...
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