The key "news" was that the staff economic forecasts are more downbeat than they were at the January meeting. Here is a key excerpt from the report:

"In the forecast prepared for the meeting, the staff revised down its outlook for economic activity. The deterioration in labor market conditions was rapid in recent months, with steep job losses across nearly all sectors. Industrial production continued to contract rapidly as firms responded to the falloff in demand and the buildup of some inventory overhangs.

"The incoming data on business spending suggested that business investment in equipment and structures continued to decline. Single-family housing starts had fallen to a post-World War II low in January, and demand for new homes remained weak.

"Both exports and imports retreated significantly in the fourth quarter of last year and appeared headed for comparable declines this quarter. Consumer outlays showed some signs of stabilizing at a low level, with real outlays for goods outside of motor vehicles recording gains in January and February...

"The staff's projections for real GDP in the second half of 2009 and in 2010 were revised down, with real GDP expected to flatten out gradually over the second half of this year and then to expand slowly next year as the stresses in financial markets ease, the effects of fiscal stimulus take hold, inventory adjustments are worked through, and the correction in housing activity comes to an end.

"The weaker trajectory of real output resulted in the projected path of the unemployment rate rising more steeply into early next year before flattening out at a high level over the rest of the year. The staff forecast for overall and core personal consumption expenditures (PCE) inflation over the next two years was revised down slightly. Both core and overall PCE price inflation were expected to be damped by low rates of resource utilization, falling import prices, and easing cost pressures as a result of the sharp net declines in oil and other raw materials prices since last summer."

They don't put a lot of numbers in, but this is the general scenario that I have been writing about for awhile now. We get a very shallow recovery starting in the fourth quarter, but it will still feel very much like a recession. That anemic recovery persists through 2010. Deflation is a bigger immediate threat than inflation (but inflation could be a big problem further out). Unemployment will likely continue rising through at least the middle of 2010, and will most likely hit double digits (on a U-3 or headline basis).

If General Motors (GM) goes bankrupt, it will drag under a slew of suppliers with it, companies like Lear (LEA) and TRW (TRW). This would greatly exacerbate the economic weakness and probably cause unemployment to top 12% -- the highest level of headline unemployment since the Great Depression. When those who can only find part time work or become discouraged are thrown in to the mix, unemployment (U-6) could rise from its current 15.3% to well over 20% in such a scenario.

It seems unlikely that U-3 unemployment will fall below 7% before early 2012. This is both a plausible scenario, and one that is far worse than the "Adverse Case" that the big bank stress tests are based on. The baseline case for the stress tests should be ignored entirely. A worsening economy will only mean more defaults and foreclosures, and more headaches for banks like Wells Fargo (WFC) and Fifth Third (FITB).