In the minutes of the meeting held on Jan. 27 & 28, policymakers downgraded their economic projections for this year and saw no signs that housing is beginning to stabilize.


The minutes also revealed that on January 16, 2009, the Committee met by conference call to discuss issues associated with establishing an explicit numerical objective for inflation but that, no decisions on whether to establish such an objective.


After citing a continued sharp contraction in real economic activity, the FOMC said it is expecting gross domestic product to contract by up to 1.3% in 2009, a larger drop than it had forecast in October.


The FOMC expects that this year's contraction would be followed by GDP growth of 2.5% to 3.3% in 2010 and growth of 3.8% to 5% in 2011.


The Fed's latest projections also show the FOMC expects unemployment this year could rise as high as 8.8%, higher than its October projection of 7.1% to 7.6%, and said that unemployment would still be well above its longer-run sustainable rate at the end of 2011.


Under the Fed's forecasts, unemployment rates would fall to between 8% and 8.3% in 2010 and to between 6.7% and 7.5% in 2011.


Core inflation is expected to fall to between 0.9% to 1.1% this year and could contract further in the coming years. The Fed in October expected 2009 core inflation of between 1.5% and 2%. Core inflation is expected to be between 0.8% and 1.5% in 2010 and 0.7% to 1.5% in 2010.


FOMC members saw no indication that the housing sector was beginning to stabilize. Some members expressed concern that the commercial real-estate sector could deteriorate sharply in the months ahead. Members expected rapid contraction in categories of business investment to continue in coming quarters.


Bernanke's Speech


During his speech today at the National Press Club, Fed chairman Bernanke offered new information regarding communication procedures by the Federal Reserve in addition to making several important points regarding the potential effects of credit easing on the money supply and inflation.


First, in order to supplement the current economic projections by governors and Reserve Bank presidents for the next three years, we will also publish their projections of the longer-term values (at a horizon of, for example, five to six years) of output growth, unemployment, and inflation, under the assumptions of appropriate monetary policy and the absence of new shocks to the economy.


He advised that the longer-term projections of inflation may be interpreted, in turn, as the rate of inflation that FOMC participants see as most consistent with the dual mandate given to it by the Congress--that is, the rate of inflation that promotes maximum sustainable employment while also delivering reasonable price stability.


Second, the Fed's lending activities have indeed resulted in a large increase in the reserves held by banks and thus in the narrowest definition of the money supply, the monetary base, Mr. Bernanke said. However, banks are choosing to leave the great bulk of their excess reserves idle, in most cases on deposit with the Fed. Consequently, the rates of growth of broader monetary aggregates, such as M1 and M2, have been much lower than that of the monetary base.


He acknowledged that some observers are concerned that by expanding the balance sheet, the central bank could stoke inflation. But with global economic activity weak and commodity prices at low levels, we see little risk of unacceptably high inflation in the near term, he said, before adding that we expect inflation to be quite low for some time.


He also said that the Federal Reserve would have to moderate growth in the money supply and begin to raise the federal funds rate, at some point in the future when conditions in the economy eased. Some observers have suggested that accomplishing this will be difficult to do, but Mr. Bernanke downplayed such concerns.


Shrinking of the balance sheet can be accomplished relatively quickly, he said. A substantial portion of the assets that the Federal Reserve holds--including loans to financial institutions, temporary central bank liquidity swaps, and purchases of commercial paper--are short-term in nature and can simply be allowed to run off as the various programs and facilities are scaled back or shut down.