WASHINGTON (MNI) – The following is the first part of excerpts from
the text of the minutes of the Federal Open Market Committee’s November
1-2 meeting published Tuesday with members’ views on current conditions
and the economic outlook. It said participants observed that “the pace
of economic recovery would likely continue to be held down for some time
by persistent headwinds”:

In conjunction with this FOMC meeting, all 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 2014 and over the
longer run. Longer-run 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 to the economy.

Although participants had revised downward their projections for
growth since their previous forecasts in June, they continued to
anticipate that economic growth would pick up and the unemployment rate
would decline gradually through 2014. They also continued to project
that inflation would settle at or below levels consistent with the
Committee’s dual mandate. Participants’ forecasts are described in more
detail 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 regarded the information received during the intermeeting
period as indicating that economic growth had strengthened somewhat in
the third quarter, reflecting in part a reversal of temporary factors
that had weighed on the economic recovery in the first half of the year.
Participants noted that global supply chain disruptions associated with
the natural disaster in Japan had diminished, and that the prices of
energy and some commodities had come down from their recent peaks,
easing strains on household budgets and likely contributing to a
somewhat stronger pace of consumer spending in recent months. More
broadly, final demand from consumers and businesses was stronger than
had been expected at the time of the September FOMC meeting.
Nonetheless, most participants anticipated that the pace of economic
growth would remain moderate over coming quarters.

While they believed that the economic recovery would continue to be
supported by accommodative monetary policy, ongoing improvements in
households’ and businesses’ financial positions, and pent-up demand for
goods and services, a number of factors were seen as likely to continue
to restrain the pace of economic growth. Those included persistent
weakness in the labor and housing markets, still-tight credit conditions
for many households and small businesses, low consumer and business
confidence, fiscal consolidation at all levels of government, and
elevated volatility in financial markets. Moreover, the recovery was
still subject to significant downside risks, including strains in global
financial markets. With longer-term inflation expectations remaining
stable, the effects of earlier increases in the prices of energy and
other commodities continuing to wane, and low levels of resource
utilization restraining increases in prices and wages, most participants
anticipated that inflation would settle, over coming quarters, at or
below levels they judged to be most consistent with their dual mandate.

In the household sector, incoming data on retail sales were
somewhat stronger than expected, and participants reported scattered
optimism among their contacts regarding the prospects for holiday
spending. Some participants thought that the effects of balance sheet
deleveraging might be running their course or that such effects could be
less powerful than had been thought. Others noted that the recent pickup
in consumer spending outpaced growth in after-tax incomes and was
accompanied by a decline in the saving rate, raising doubts about its
sustainability unless income growth picked up.

In addition, households appeared to remain pessimistic about the
prospects for their future income, the job market was still weak,
consumer confidence was historically very low, and credit conditions for
many households were still tight. The housing sector continued to be
depressed, and some meeting participants indicated that the elevated
supply of available homes and the overhang of foreclosures, together
with limited access to mortgage credit, were continuing to put downward
pressure on house prices and housing construction. A few participants
noted that recent government initiatives aimed at helping
high-loan-tovalue borrowers refinance could be useful steps toward
stabilizing the housing market.

Business contacts in many parts of the country were reported to be
cautious and uncertain about the economic and political outlook and so
remained reluctant to hire or expand capacity. However, production in
the manufacturing, agriculture, and energy sectors continued to
increase, and the auto sector was rebounding from earlier supply chain
disruptions. In addition, businesses in a number of regions reported
ongoing capital investment to increase productivity. Input cost
pressures were said to have abated somewhat, while labor costs remained
subdued. Overall, credit costs were low, and profits and balance sheets
at nonfinancial corporations were healthy, with many firms continuing to
hold very high levels of cash.

Despite some signs of improvement of late, the available indicators
pointed to continued weakness in overall labor market conditions, and
the unemployment rate remained elevated. Some participants suggested
that the persistently high level of unemployment reflected the impact of
structural factors, including mismatches between the skills of the
unemployed and the skills demanded in sectors in which jobs were
currently available. Consistent with this view, some business contacts
reportedly were concerned about the low quality of many job applicants,
while other contacts noted that workers with some specialized skills
continued to be in short supply. However, other participants indicated
that such concerns were not new and that much of the current elevated
level of unemployment reflected cyclical factors, with one pointing to
the lack of wage pressures as evidence. As a result, they expected that
unemployment would fall back as the economy recovered.

Some participants again warned that the exceptionally high level of
long-term unemployment could ultimately lead to permanent negative
effects on the skills and employment prospects of the unemployed.

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

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