WASHINGTON (MNI) – The following is an excerpt from the text of the
minutes of the Federal Open Market Committee’s April 26-27 meeting
published Wednesday. The section below is Participants’ Views on Current
Conditions and the Economic Outlook:

In conjunction with this FOMC meeting, all meeting participants-the
five members of the Board of Governors and the presidents of the 12
Federal Reserve Banks-provided projections of output growth, the
unemployment rate, and inflation for each year from 2011 through 2013
and over the longer run. Longerrun projections represent each
participant’s 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 discussing intermeeting developments and their implications for
the economic outlook, participants agreed that the information received
since their previous meeting was broadly consistent with continuation of
a moderate economic recovery, despite an unexpected slowing in the pace
of economic growth in the first quarter. While construction activity
remained anemic, measures of consumer spending and business investment
continued to expand and labor market conditions continued to improve
gradually. Participants viewed the weakness in first’quarter economic
growth as likely to be largely transitory, influenced by unusually
severe weather, increases in energy and other commodity prices, and
lower’than’expected defense spending. As a result, they saw economic
growth picking up later this year.

Participants’ forecasts for economic growth for 2012 and 2013 were
largely unchanged from their January projections and continued to
indicate expectations that the recovery will strengthen somewhat over
time. Nonetheless, the pickup in the pace of the economic expansion was
expected to be limited, reflecting the effects of high energy prices,
modest changes in housing wealth, subdued real income gains, and fiscal
contraction at the federal, state, and local levels. Participants
continued to project the unemployment rate to decline gradually over the
forecast period but to remain elevated compared with their assessments
of its longerrun level. Participants revised up their projections for
total inflation in 2011, reflecting recent increases in energy and other
commodity prices, but they generally anticipated that the recent
increase in inflation would be transitory as commodity prices stabilize
and inflation expectations remain anchored. However, they all agreed on
the importance of closely monitoring developments regarding inflation
and inflation expectations.

Participants’ judgment that the recovery was continuing at a
moderate pace reflected both the incoming economic indicators and
information received from business contacts. Growth in consumer spending
remained moderate despite the effects of higher gasoline and food
prices, which appeared to have largely offset the increase in disposable
income from the payroll tax cut. Participants noted that these higher
prices had weighed on consumer sentiment about near’term economic
conditions but that underlying fundamentals for continued moderate
growth in spending remained in place. These underlying factors included
continued improvement in household balance sheets, easing credit
conditions, and strengthening labor markets.

Activity in the industrial sector also expanded further. Industrial
production posted solid gains, and, while the most recent readings from
some of the regional manufacturing surveys showed small declines, in
some cases these were from near’record highs. Manufacturers remained
upbeat, although automakers were reporting some difficulties in
obtaining parts normally produced in Japan, which might weigh on motor
vehicle production in the current quarter. Investment in equipment and
software was fairly robust. In contrast, the housing sector remained
distressed, with house prices flat to down and a large overhang of
vacant properties restraining new construction, although reports
indicated that sales volumes and traffic were higher in a few areas.
Activity in the commercial real estate sector continued to be weak.

Several participants indicated that, in contrast to the somewhat
weaker recent economic data, their business contacts were more positive
about the economy’s prospects, which supported the participants’ view
that the recent weakness was likely to prove temporary. They
acknowledged, however, that sentiment can change quickly; indeed, one
participant noted that his contacts had recently turned more
pessimistic, and several participants indicated that their business
contacts expressed concern about the effects of higher commodity prices
on their own costs and on the purchasing power of households.

Participants judged that overall conditions in labor markets had
continued to improve, albeit gradually. The unemployment rate had
decreased further and payroll employment had risen again in March. Some
participants reported that more of their business contacts have plans to
increase their payrolls later this year. A few participants noted that
firms may be poised to accelerate their pace of hiring because they have
exhausted potential productivity gains, but others indicated that some
firms may be putting hiring plans on hold until they are more certain of
the future trend in materials and other input costs. Signs of rising
wage pressures were reportedly limited to a few skilled job categories
for which workers are in short supply, while, in general, increases in
wages have been subdued. Participants discussed whether the significant
drop in the unemployment rate might be overstating the degree of
improvement in labor markets because many of the unemployed have dropped
out of the labor force or have accepted jobs that are less desirable
than their former jobs.

Financial market conditions continued to improve over the
intermeeting period. Equity prices had risen, on balance, since the
previous meeting, reflecting an improved outlook for earnings, and were
up more substantially since the start of the year. Bankers again
reported improvements in credit quality, with the volume of
nonperforming assets declining at larger banks and leveling off at
smaller banks. In general, loan demand remained weak. However, bank
lending to mediumsized and larger companies increased, and lending to
small businesses picked up slightly. Banks reported an easing of lending
terms on C&I loans, usually prompted by increased competition in the
face of still’weak loan demand. Consumer credit conditions also eased
somewhat from the tight conditions seen during the recession. However,
demand for consumer credit other than auto loans reportedly changed
little. A few participants expressed concern that the easing of credit
conditions was creating incentives for increased leverage and
risk’taking in some areas, such as leveraged syndicated loans and loans
to finance land acquisition, and that this trend, if it became
widespread and excessive, could pose a risk to financial stability.

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

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