On December 15, the Federal Reserve Open Market Committee (FOMC) will begin its final meeting of 2008. Since the FOMC’s last meeting on October 29, the U.S. economic situation has worsened. Just last week, the National Bureau of Economic Research announced that the American economy has been in recession since December 2007.

Here are some of the key economic indicators that the FOMC will be considering:

(1). Employment conditions are deteriorating rapidly. In November, the U.S. economy lost 530,000 jobs, which represented its largest monthly loss in 34 years. Since January 2008, the economy has shed 1.9 million jobs.

(2). Significant output and labor market gaps have emerged; these will continue to exert downward pressure on inflation. The unemployment rate has jumped from a cyclically low level of 4.5 percent to its present level of 6.7 percent, while economic output could be as much as 5-6 percentage points below its potential.

(3). There has been a marked deceleration in consumer and producer price inflation, and various data suggest that markets are expecting negative inflation over the next several years.

(4). Falling oil and food prices indicate that there will be further downward pressure on inflation in the months ahead.

(5). It appears that plummeting housing and equity prices, together with a tightening of credit markets, are having a major impact on consumer spending, which accounts for roughly 70 percent of total aggregate demand. Over the past two months, consumer spending has suffered its most precipitous decline since 1980.

(6). Surveys of both manufacturing and non-manufacturing producer managers reveal a bleak outlook for manufacturing and service production.

(7). The Federal Reserve’s regular survey of economic conditions suggests that the economy is weakening substantially in most parts of the country.

At its December 15-16 meeting, the FOMC is expected to cut the federal funds rate by 50 basis points, bringing it to the historically low level of 0.5 percent. (By way of perspective, at the peak of the interest rate cycle in August 2007, the federal funds rate was 5.5 percent.) In all likelihood, since there is practically no room for further rate cuts, the FOMC will signal that it is moving toward quantitative monetary policy easing in hopes of warding off deflation.

Desmond Lachman is a resident fellow at the American Enterprise Institute.

Image by Darren Wamboldt/The Bergman Group.