Members of the Federal Open Market Committee painted a gloomy view of the nation’s economy in their meeting last month when the voted to cut the target Federal Funds rate to an unprecedented 0 to 0.25% range at the Dec. 15-16 meeting, according to minutes of that meeting released today. 

Participants in the meeting, the minutes said, generally agreed there was “considerable” uncertainty to their collective view the economy would begin to recover in the second half of 2009 and “agreed that the economic downturn had intensified over the fall.”

They said “credit conditions continued to tighten for both households and businesses, and ongoing declines in equity prices further reduced household wealth” as “conditions in the housing market weakened again and house prices declined further.”

“Most” of the FOMC members, according to the minutes, “projected that the economy would begin to recover slowly in the second half of 2009, aided by substantial monetary policy easing and by anticipated fiscal stimulus.” 

The Committee essentially dismissed inflation as a concern noting “inflationary pressures looked set to moderate further in coming quarters, reflecting recent declines in commodity prices and rising slack in resource markets. And, several members of the Committee, the minutes said, suggested, “inflation could drop for a time below rates they viewed as most consistent over time with the Federal Reserve’s dual mandate for maximum employment and price stability.”

Several meeting participants, the minutes said, the Committee would have to be on guard “for signs of disinflationary dynamics.” 

The meeting according to the minutes included a joint session with the Federal Reserve Board of Governors, with an extensive discussion of “how in current circumstances the Committee could best support the resumption of sustainable economic growth and promote the maintenance of price stability” its two legislative mandates.

Meeting participants said very low levels of the federal funds rate had the potential to prop up demand and economic activity, but “also had potential costs in terms of the functioning of certain financial markets and some financial institutions.”

According to the minutes, meeting participants acknowledged that with the federal funds rate trading at very low levels, “the Committee would need to focus on other tools” to stimulate the economy including greater transparency to provide more information regarding future rate movements.

The Committee members agreed “communicating the Committee’s expectation that short-term interest rates were likely to stay exceptionally low for some time could be useful because it could lead to pricing of longer-term interest rates consistent with the path of monetary policy that policymakers saw as most likely.”

Many participants, the minutes said, suggested “the Federal Reserve should continue to consider whether expanding some of the existing facilities and creating new facilities could be helpful” hinting at further fiscal and monetary innovations.

Meeting participants “acknowledged that the effective federal funds rate probably would need to remain very low for some time” but that “as economic activity recovered and financial conditions normalized, the use of certain policy tools would need to be scaled back, the size of the balance sheet and level of excess reserves would need to be reduced, and the Committee’s policy framework would return to focus on the level of the federal funds rate.

The Committee also discussed acquiring a variety of assets “as needed” to deal with “financial and macroeconomic strains.”

The Committee “discussed the potential advantages and disadvantages of setting quantitative targets for bank reserves or the monetary base” as a tool to increase bank lending.

The Committee, according to the minutes, spent some time discussing how to communicate its decision, including the establishment of a rate range.

Some members, “felt that lack of an explicit target could be helpful, in that it would focus attention on the shift in the policy framework from targeting the federal funds rate to the use of balance sheet policies and communications about monetary policy as a way of providing further monetary stimulus,” but “a few members stressed that the absence of an explicit federal funds rate target would give banks added flexibility in pricing loans and deposits in the current environment of unusually low interest rates.”

However, “other members noted that not announcing a target might confuse market participants and lead investors to believe that the Federal Reserve was unable to control the federal funds rate when it could, in fact, still influence the effective federal funds rate through adjustments of the interest rate on excess reserves and the primary credit rate.”

The Committee meets next at the end of January.

Mark Lieberman is the senior economist for the Fox Business Network. Prior to joining FOX, he served as first vice president and manager of economic analysis and research at Washington Mutual in New York. Before that, he served as senior vice president at Dime Savings Bank of New York (which was later acquired by Washington Mutual), where he specialized in credit and risk management. He is a member of the Executive Committee of the New York Association for Business Economics. He has a degree in Economics from the Wharton School of the University of Pennsylvania.