Similar stresses were again evident in the financial markets of major foreign economies. However, economic news in these economies was generally less downbeat than in the United States, leading to expectations of greater monetary easing in the United States than elsewhere. The trade-weighted foreign exchange value of the dollar against major currencies declined notably.

M2 increased strongly in January and February, boosted primarily by heightened demands for the relative safety and liquidity of money market mutual funds. The decline in opportunity costs associated with monetary policy easing also supported rapid growth of liquid deposits.

In the two weeks prior to the March meeting, the Federal Reserve announced several measures to bolster liquidity and promote orderly functioning in financial markets. On March 7, the Federal Reserve announced that it would initiate a series of term repurchase transactions that would facilitate funding of primary dealers'' assets and that the volume of lending through the Term Auction Facility (TAF) would be increased. On March 11, the Federal Reserve, in coordination with other central banks, announced the expansion and extension of the reciprocal currency arrangements that were established in December as well as the creation of a Term Securities Lending Facility (TSLF) under which the Federal Reserve would lend Treasury securities to primary dealers for longer terms than in the existing program and based on a broader range of collateral. On March 14, the Federal Reserve Board approved the temporary financing arrangement announced that morning by JPMorgan Chase & Co. and The Bear Stearns Companies Inc. On March 16, the Federal Reserve announced the creation of a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. In addition, the Federal Reserve lowered the primary credit rate, or discount rate, 25 basis points to 3.25 percent, and extended the maximum maturity of primary credit loans to ninety days from thirty days. It also approved the longer-term financing arrangement announced that evening by JPMorgan Chase and Bear Stearns in conjunction with the acquisition of Bear Stearns by JPMorgan Chase.

Over the intermeeting period, the expected path of monetary policy over the next year as measured by money market futures rates moved down sharply, largely in response to softer-than-expected economic data releases and deteriorating financial market conditions. The Committee''s action at the January 30 meeting had been viewed by market participants as the most likely outcome, but near-term futures rates declined a few basis points as investors had placed some probability on a smaller policy move. Neither the subsequent release of the minutes of the meeting nor the March 7 Federal Reserve announcements elicited significant market reaction. The March 11 TSLF announcement was followed by a step-up in money market futures rates as liquidity concerns eased somewhat and market participants evidently concluded that less policy easing would be needed than previously anticipated. However, liquidity concerns reemerged subsequently, prompting a further drop in money market futures rates. Consistent with the shift in the economic outlook, the revision in policy expectations, and the reduction in the target federal funds rate, yields on short- and medium-term nominal Treasury coupon securities declined substantially after the January 30 FOMC meeting. However, yields on long-term Treasuries fell much less than those on shorter-term instruments, and the yield curve steepened significantly. Inflation compensation--the difference between yields on nominal Treasury securities and those on inflation-indexed issues--was little changed on balance for shorter-term issues, but longer-term inflation compensation rose.

In the forecast prepared for this meeting, the staff substantially revised down its projection for the pace of real GDP throughout 2008. Although the available data on spending and production early in the first quarter were not materially weaker than the staff''s expectations, many other indicators of real activity were more negative. Payroll employment declined substantially; oil prices surged again, crimping real household incomes; and measures of consumer and business sentiment deteriorated sharply. Moreover, house prices fell by more than anticipated, and conditions in a broad range of debt markets became more restrictive. The staff projection showed a contraction of real GDP in the first half of 2008 followed by a slow rise in the second half. The recently enacted fiscal stimulus package was expected to boost real GDP in the second half of 2008, but that effect was projected to unwind in 2009. The forecast showed real GDP rising at a rate somewhat above the growth rate of its potential in 2009, in response to the impetus from cumulative monetary policy easing, continued strength in net exports, a lessening drag from high oil prices, and a relaxation of financial market strains. Even with this pickup in growth in 2009, resource utilization was anticipated to follow a lower trajectory than in the previous forecast.

The forecast for core PCE price inflation over the first half of 2008 was raised in response to elevated readings in recent months. In addition, the forecast for headline PCE price inflation incorporated a much higher rate of increase for energy prices for the first half of the year; as a result, headline PCE price inflation was expected to substantially exceed core PCE price inflation in 2008. By 2009, the forecasts for both the headline and core PCE price indexes showed inflation receding from its 2008 level, in line with the previous forecasts.

In their discussion of the economic situation and outlook, FOMC participants noted that prospects for both economic activity and near-term inflation had deteriorated in view of increasingly fragile financial markets and tighter credit conditions, rising prices for oil and other commodities, and the deepening contraction in the housing sector. Home prices had declined more steeply than anticipated, and the weakening housing market, combined with a softening in labor markets, appeared to be weighing on consumer sentiment. Businesses also were seen as becoming more pessimistic and cautious, despite a strong foreign demand for U.S. goods. Strains in financial markets had increased, portending a possible further tightening in the availability of credit to households and businesses. Against this backdrop, many participants thought some contraction in economic activity in the first half of 2008 now appeared likely. The economy was expected to begin to recover in the second half of the year, supported by recent monetary policy easing and fiscal stimulus. Accommodative monetary policy and a recovery in financial markets along with an abatement of the downdraft in housing activity were expected to help foster a further pickup in economic growth in 2009. However, considerable uncertainty surrounded this forecast, and some participants expressed concern that falling house prices and stresses in financial markets could lead to a more severe and protracted downturn in activity than currently anticipated. Participants noted that recent readings on inflation had generally been elevated, that energy prices had risen sharply, and that some indicators of inflation expectations had risen. Most participants anticipated that a flattening of oil and other commodity prices and easing pressures on resources would contribute to some moderation in inflation pressures. Nonetheless, uncertainties about the outlook for inflation had risen.

Stresses in financial markets had intensified noticeably since the January meeting. Several meeting participants noted that price discovery for mortgage-related financial assets had become increasingly difficult in an environment of declining house prices and considerable uncertainty as to the ultimate extent of such declines. With the magnitude and distribution of losses on mortgage assets quite unclear and many financial institutions experiencing significant balance sheet pressures, many lenders pulled back from risk taking--notably by increasing collateral margins on secured lending--and liquidity diminished in a number of financial markets. In these circumstances, many market participants were experiencing greater difficulties obtaining funding, and meeting participants regarded financial markets as unusually fragile. The new liquidity facilities recently introduced by the Federal Reserve would probably be helpful in bolstering market liquidity and promoting orderly market functioning, but even so, the ongoing strains were likely to raise the price and reduce the availability of credit to businesses and households. Evidence that an adverse feedback loop was under way, in which a restriction in credit availability prompts a deterioration in the economic outlook that, in turn, spurs additional tightening in credit conditions, was discussed. Several participants noted that the problems of declining asset values, credit losses, and strained financial market conditions could be quite persistent, restraining credit availability and thus economic activity for a time and having the potential subsequently to delay and damp economic recovery.

Participants noted that the contraction in the housing sector had deepened and that considerable uncertainty surrounded the outlook for housing. Although some stabilization in housing markets was likely needed to help underpin an economic recovery in coming quarters, there was little indication that that process had yet begun. Elevated rates of foreclosures and large inventories of unsold property were likely to depress home prices for some time. Lower home prices would eventually buoy home buying, but in the meantime the prospect of continued price declines could lead potential homebuyers to defer purchases for a time, further damping housing activity and adding to downward pressure on home values. Participants noted that the trajectory of house prices was a major source of uncertainty in their economic outlook.

Recent data and anecdotal reports from business contacts suggested that consumer spending was decelerating noticeably, though it apparently had not yet actually declined substantially. Participants noted that private payroll employment had fallen in February for the third consecutive month, and suggested that increasing concerns among workers about prospects for employment and income likely were holding down consumer outlays. Rising energy prices were also damping growth in real incomes. One participant reported that lenders were restricting draws on home equity lines, and the tightening of credit availability more generally was probably starting to constrain consumer spending. Also, the continued fall in home prices and declines in equity prices were weighing on household wealth, with a depressing effect on spending.

The outlook for business spending had also dimmed since the time of the January meeting. Anecdotal reports from many regions of the country pointed to a retrenchment in capital spending in response to increased pessimism about economic prospects and heightened caution on the part of business managers. The tightening supply of credit was seen as exacerbating this softness in business outlays and contributing particularly to a pullback from nonresidential construction projects. However, investment spending on agricultural equipment was reported to be quite strong, spurred by soaring crop prices. Reports on inventories were mixed but, overall, inventories appeared to be roughly in balance with desired levels.

In discussing the external sector of the economy, some participants indicated that net exports remained a notable source of support for the economy. Growth in exports was being supported by strength in foreign economies as well as declines in the foreign exchange value of the dollar. However, some of the recent increase in net exports resulted from weaker imports, which reflected softer domestic spending. Some participants saw somewhat slower global economic growth as a possible consequence of the problems in financial markets and weakness in the United States and noted that such a development could potentially limit the support that exports would provide to the U.S. economy going forward.

The recent information on inflation was seen as disappointing. With the exception of the February report on consumer prices, readings on inflation had generally been elevated. Agricultural prices were rising at a substantial clip, partly in response to strong global demand, lean supplies, and a lower foreign exchange value of the dollar. Other commodity prices also were climbing rapidly, and crude oil prices were near record levels. Several participants stated that business contacts had emphasized that their input costs were rising and that they were seeking to pass on higher costs to their customers. Some participants, however, expressed the view that emerging economic slack would limit the extent to which firms could pass on their higher costs and could serve to damp inflation more generally. Moreover, available data and anecdotal reports suggested that unit labor costs were rising only modestly, and thus were seen as unlikely to exert significant upward pressure on prices. Weaker growth, both in the United States and abroad, should also contribute to a flattening of oil and other commodity prices over time, which would also reduce price pressures and the threat of rising inflation expectations. On balance, most participants still expected inflation to moderate later this year and in 2009. However, the recent depreciation of the dollar could boost import prices and thus contribute to higher inflation. Moreover, with both core and headline inflation having been somewhat elevated, participants expressed some concern that inflation expectations might become less firmly anchored. Indeed, some indicators suggested that inflation expectations had edged higher of late. In view of these considerations, significant uncertainty attended the near-term outlook for price pressures. On balance, however, participants emphasized that appropriate monetary policy, combined with effective communication of the Committee''s commitment to price stability, would foster price stability over time.

In the Committee''s discussion of monetary policy for the intermeeting period, most members judged that a substantial easing in the stance of monetary policy was warranted at this meeting. The outlook for economic activity had weakened considerably since the January meeting, and members viewed the downside risks to economic growth as having increased. Indeed, some believed that a prolonged and severe economic downturn could not be ruled out given the further restriction of credit availability and ongoing weakness in the housing market. Members recognized that monetary policy alone could not address fully the underlying problems in the housing market and in financial markets, but they noted that, through a range of channels, lower short-term real interest rates should help buoy economic activity and ameliorate strains in these markets. Even with a substantial easing at this meeting, most members saw overall inflation as likely to moderate in coming quarters, reflecting a projected leveling-out of energy and commodity prices and an easing of pressures on resource utilization. However, inflation pressures had apparently risen even as the outlook for growth had weakened. With the uncertainties in the outlook for both economic activity and inflation elevated, members noted that appropriately calibrating the stance of policy was difficult, partly because some time would be required to assess the effects of the substantial easing of policy to date. All in all, members judged that a 75 basis point easing of policy at this meeting was appropriate to address the combination of risks of slowing economic growth, inflationary pressures, and financial market disruptions.

The Committee agreed that the statement to be released after the meeting should indicate that economic activity had weakened further, reflecting slower growth in consumer spending and softening in the labor market, that financial markets remained under considerable stress, and that the tightening of credit conditions and the deepening of the housing market contraction were likely to weigh on economic growth over the next few quarters. Given recent developments, the Committee concurred that the statement should note that inflation had been elevated and that some indicators of inflation expectations had risen, but agreed that the announcement should also reiterate that inflation was expected to moderate in coming quarters. As in recent statements, the Committee emphasized that it would continue to monitor inflation developments carefully. The Federal Reserve had implemented a number of measures to foster market liquidity in recent weeks, and members thought that the statement should note that policy actions taken today and earlier, including those liquidity measures, would promote moderate growth over time. In light of the uncertainties regarding the housing sector and financial market developments, however, the Committee repeated its recent indications that downside risks to growth remained. The Committee agreed on the need to act in a timely manner to promote its dual objectives of sustainable economic growth and price stability.

At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive:

""""The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with reducing the federal funds rate to an average of around 2-1/4 percent.""""

The vote encompassed approval of the statement below to be released at 2:15 p.m.:

""""The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent.

Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.