WASHINGTON (MNI) – The following is the second of three sections
of selected excerpts from the Federal Open Market Committee minutes
published Tuesday:

Economic Outlook

In conjunction with this FOMC meeting, all meeting participantsthe
six members of the Board of Governors and the heads of the 12 Federal
Reserve Banks provided projections of output growth, the unemployment
rate, and inflation for each year from 2010 through 2013 and over the
longer run. Longer-run projections represent each participants
assessment of the rate to which each variable would be expected to
converge, over time, under appropriate monetary policy and in the
absence of further shocks. Participants forecasts are described in the
Summary of Economic Projections, which is attached as an addendum to
these minutes.

In their discussion of the economic situation and outlook, meeting
participants generally agreed that the incoming data indicated that
output and employment were continuing to increase, but only slowly.
Progress toward the Committees dual objectives of maximum employment
and price stability was described as disappointingly slow. Participants
variously noted a number of factors that were restraining growth,
including low levels of household and business confidence, concerns
about the durability of the economic recovery, continuing uncertainty
about the future tax and regulatory environment, still-weak financial
conditions of some households and small businesses, the depressed
housing market, and waning fiscal stimulus. Although participants
considered it quite unlikely that the economy would slide back into
recession, some noted that continued slow growth and high levels of
resource slack could leave the economic expansion vulnerable to negative
shocks. In the absence of such shocks, and assuming appropriate monetary
policy, participants economic projections generally showed growth
picking up to a moderate pace and the unemployment rate declining
somewhat next year. Participants generally expected growth to strengthen
further and unemployment to decline somewhat more rapidly in 2012 and
2013.

Indicators of spending by households and businesses remained mixed.
Consumer spending was expanding gradually. Participants noted that
households were continuing their efforts to repair their balance sheets,
a process that was restraining growth in consumer spending. Sluggish
employment growth and elevated uncertainty about job prospects also
continued to weigh on household spending. With respect to business
spending, contacts generally reported that they were investing to reduce
costs but were refraining from adding workers or expanding capacity in
the United States. Energy producers were an exception. Participants
observed that firms had generated rising profits, but that business
contacts indicated those gains largely reflected cost-cutting rather
than top-line growth in revenues. A number of businesses continued to
report that they were holding back on hiring and capital spending
because of uncertainty about future taxes, health-care costs, and
regulations. But concerns about actual and anticipated demand also were
important factors limiting investment and hiring. Firms continued to
report strong foreign demand for their products, particularly from Asia.

Participants noted that the housing sector, including residential
construction and home sales, remained depressed. Foreclosures were
adding to the elevated supply of available homes and putting downward
pressure on home prices and housing construction. Some participants saw
disputes over mortgage and foreclosure documents as likely to delay the
eventual recovery in housing markets. Commercial real estate markets
also were weak, and the availability of credit for commercial real
estate transactions remained limited, but low interest rates were
helping stabilize prices. Participants agreed that progress in reducing
unemployment was disappointing; indeed, several noted that the recent
rate of output growth, if continued, would more likely be associated
with an increase than a decrease in the unemployment rate. Participants
again discussed the extent to which employment was being held down, and
the unemployment rate boosted, by structural factors such as mismatches
between the skills of the workers who had lost their jobs and the skills
needed in the sectors of the economy with vacancies, the inability of
the unemployed to relocate because their homes were worth less than the
principal they owed on their mortgages, and the effects of extended
unemployment benefits on the duration of unemployed workers search for
a new job. Participants agreed that such factors were contributing to
continued high unemployment but differed in their assessments of the
magnitude of such effects. Many participants saw evidence that the
current unemployment rate was well above levels that could be explained
by structural factors alone, noting, for example, reports from business
contacts indicating that weak growth in demand for their firms products
remained a key reason why they were reluctant to add employees, and job
vacancy rates that were low relative to historical experience. A number
of participants noted that continued high unemployment, particularly
with large numbers of workers suffering very long spells of
unemployment, would lead to an erosion of workers skills that would
have adverse consequences for those workers and for the economys
potential level of output in the longer term. Participants saw financial
conditions as having become more supportive of growth over the course of
the intermeeting period; most, though not all, of the change appeared to
reflect investors increasing anticipation of a further easing of
monetary policy. Most longer-term nominal interest rates declined, real
interest rates fell even more, credit spreads tightened, and equity
prices rose, in part reflecting better-than-expected corporate earnings
reports. Inflation compensation rose noticeably, returning to a level
more typical of recent years. Participants noted that credit remained
readily available in debt markets and from banksfor larger
corporations, and there were some signs that credit conditions had begun
to improve for smaller firms that obtain credit primarily from banks.
Banking institutions reported signs of improving credit quality.
Improvements in household financial conditions were contributing to
better performance of consumer loans. However, banks continued to report
elevated losses on commercial real estate loans, especially construction
and land development loans. Participants noted the risk of losses at
financial institutions stemming from investors putting mortgages back to
sellers if the quality of the loans was misrepresented when the
mortgages were sold into securitization vehicles.

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** Market News International Washington Bureau: 202-371-2121 **

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