Todd Sullivan's - ValuePlays

In their discussion of the economic situation and outlook, many FOMC participants noted that recent developments suggested that economic activity was likely to remain damped for several quarters. Although economic growth in the second quarter had apparently been boosted by fiscal stimulus, resilience in consumption spending even before tax rebates were distributed, and robust gains in exports, recent indicators pointed to a near-term deceleration in household spending and to softer export demand. Moreover, increasing concerns about financial institutions had contributed to a widening of some risk spreads and a further tightening of credit to households and businesses. Growth in overall economic activity was generally expected to be weak during the remainder of 2008 before recovering modestly next year, and nearly all meeting participants saw continuing downside risks to growth. Recent readings on inflation had been high, but growth in unit labor costs had remained subdued and commodity prices had declined of late. Accordingly, most participants anticipated that inflation would moderate in coming quarters. However, participants also expressed significant concerns about the upside risks to inflation, particularly the risk that longer-term inflation expectations could become unmoored.

Headline inflation was generally expected to moderate in coming quarters, reflecting importantly an anticipated leveling-out of prices for energy and other commodities. Although measures of core inflation might well edge up later this year, given the pass-through to final goods prices of earlier increases in the prices of energy and other inputs, most participants anticipated that core inflation would edge back down during 2009. Some participants reported that firms were increasingly using various pricing strategies--such as escalation clauses or the imposition of fuel surcharges--to pass higher costs on to their customers, who were apparently becoming less resistant to such price adjustments. However, one participant mentioned the difficult pricing decisions of manufacturers who face a combination of elevated input costs along with weakening demand for their products. And a number of participants noted that the outlook for slack in resource utilization should tend to limit the extent of pass-through, contain the degree of inflation spillover to goods and services without high commodity content, and reinforce the anticipated moderation in inflation.

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