Fed sets inflation target, cuts growth projection
The U.S. Federal Reserve Board introduced an inflation target of 2% this week; the target serves to anchor public expectations. Fed officials also downgraded their growth forecasts for the year and now estimate long-term economic growth at 2.5% to 2.7% and an unemployment rate of 4.8% to 5%. The creation of a long-term inflation target helps bring the Fed closer to the central banks of the eurozone, United Kingdom, and other countries that set targets for price increases. The change is part of Fed Chairman Ben S. Bernanke’s campaign to make the U.S. central bank more transparent in the communication of its policy.

Job market continues to deteriorate
The number of Americans collecting unemployment benefits jumped to 4.99 million two weeks ago. In January U.S. companies fired 598,000 workers, the most since 1974. Since the recession began 3.6 million jobs have been lost.

Consumer inflation vanishes; producer prices rise in January
U.S. annual inflation disappeared for the first time in over 50 years as recession and falling energy prices led to a reversal in price pressures. However, consumer prices advanced on a monthly basis in January, calming some fears that the United States might face a period of deflation. Prices paid to U.S. producers also rose in January for the first time in six months as fuel costs climbed. The rise came as companies boosted prices in an effort to increase earnings as sales slumped. Economists are skeptical that companies will be able to maintain the higher prices given the weakening economy and rising unemployment.
U.S. and global corporate news
General Motors and Chrysler told the U.S. government they may need up to $21.6 billion more in combined bailout loans if they are to recover. At the same time, European governments gave GM’s request for financial support a cool reception. Sweden flatly refused to underwrite GM’s Saab unit. GM is trying to line up $6 billion in financial support from five countries by March 31. After Sweden’s rejection of GM’s request, Saab Automobile filed for protection from creditors. The move came after GM said it would cut ties with the Swedish carmaker following two decades of losses.

Goodyear Tire & Rubber announced a loss in the fourth quarter amid slumping output. The largest tire maker in North America also said it planned to cut another 5,000 jobs, freeze salaries, and pursue asset sales. In general, tire makers have been squeezed by rising raw material costs and production cuts by automakers a well as consumer delays in purchases.

Global economic news

BOJ expands asset-purchase program
The Bank of Japan said this week that it will buy corporate bonds for the first time and extend lending programs already in place to prevent a shortage of credit from worsening the nation’s recession. Policymakers have said they want to lower companies’ borrowing costs rather than cut their key policy rate, which is already close to zero.

Japan’s economy contracts at fastest pace in 35 years
In the fourth quarter of 2008, Japan’s economy contracted at its fastest pace in nearly 35 years, shrinking by 3.3%, or an annualized pace of 12.7%. The decline was more than twice as fast as the slowing in the United States and eurozone. A 14% drop in exports and reduced corporate spending was largely behind the slowing.

Taiwan becomes latest Asian economy to fall into recession
Taiwan’s central bank cut interest rates to record lows after the economy officially entered recession this week. The government said in the fourth quarter of 2008 gross domestic product contracted a record 8.36% from a year earlier. After the announcement the bank cut rates by 25 basis points. This move was unscheduled and the seventh cut since September.

Stay focused and diversified
In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your financial advisor, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon, and tolerance for risk. Diversification does not guarantee a profit or protect against loss.

The views expressed here are those of MFS^®and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of any MFS investment product. Individual securities mentioned are for illustrative purposes only and may not be relied upon as investment advice or as an indication of trading intent on behalf of any MFS product.

Securities discussed may or may not be holdings in any of the MFS funds. For a complete list of holdings for any MFS portfolio, please see the most recent annual, semiannual, or quarterly report.

The Dow Jones Industrial Average (DJIA) measures the U.S. stock market; the Standard & Poor’s 500 Stock Index (S&P 500) measures the broad U.S. stock market; and the NASDAQ Composite Index measures domestic and foreign-based stocks traded on the National Association of Securities Dealers Automated Quotation system.

Past performance is no guarantee of future results.

Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times.