WASHINGTON (MNI) – The following is the second and final 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”:

Meeting participants observed that financial markets continued to
be particularly volatile during the intermeeting period as investors
responded to incoming economic data and to news regarding fiscal and
financial developments in Europe. Liquidity in many markets worsened, in
part because financial institutions more reliant on short-term funding
markets reportedly pulled back from risk-taking and became somewhat less
willing to make markets. Participants noted the announcement by European
policymakers of a new package of measures to address Greece’s fiscal
situation as well as the vulnerabilities of European banks and
sovereigns.

However, participants indicated that many details of the new plan
had not yet been worked out and that a number of important issues
remained unresolved. Participants took note of the possible adverse
effects on U.S. financial markets and the broader U.S. economy if
European sovereign debt and banking problems intensified.

Participants observed, however, that the capital and liquidity
positions of U.S. banks had strengthened in recent quarters and that the
credit quality of loans to businesses and households had improved
further. Contacts in the banking sector reported that U.S. banks
continued to be willing to extend loans to creditworthy borrowers, but
loan demand remained weak and competition for such borrowers was putting
pressure on net interest margins. It was noted that very low interest
rates were negatively affecting pension funds and the profitability of
the life insurance industry. Participants also discussed the events
surrounding the bankruptcy filing of MF Global Holdings Ltd. and saw the
financial stability implications of this development as limited to date.

Participants generally agreed that measures of total inflation
appeared to have moderated since earlier in the year as prices of energy
and some commodities declined from their peaks. Measures of core
inflation also seemed to have declined in recent months, and longerterm
inflation expectations remained well anchored. Nonetheless, some
participants noted that core inflation had not come down as quickly or
by as much as they had expected in light of the reduction in commodity
prices, perhaps suggesting that the level of potential output was lower
than had been thought. However, other participants pointed to the
subdued pace of gains in labor costs as a factor damping inflation, and
reports from contacts suggested that upward pressure on wages remained
limited.

Regarding their overall outlook for economic activity, participants
generally agreed that, even with the positive news received over the
intermeeting period, the most probable outcome was a moderate pace of
economic growth over the medium run with only a gradual decline in the
unemployment rate.

While some factors were seen as likely to support growth going
forward — such as pent-up demand, improvements in household and
business balance sheets, and accommodative monetary policy —
participants observed that the pace of economic recovery would likely
continue to be held down for some time by persistent headwinds. In
particular, they pointed to very low levels of consumer and business
confidence, further efforts by households to deleverage, cutbacks at all
levels of government, elevated financial market volatility, still-tight
credit conditions for some households and small businesses, and the
ongoing weakness in the labor and housing markets.

While recent incoming data suggested reduced odds that the economy
would slide back into recession, participants still saw significant
downside risks to the outlook for economic growth. Risks included
potential spillovers to U.S. financial markets and institutions, and so
to the broader U.S. economy, if the European debt and banking crisis
were to worsen significantly. In addition, participants noted the risk
of a larger-thanexpected fiscal tightening and the possibility that
structural problems in the housing market had attenuated the
transmission of monetary policy actions to the real economy. It was also
noted that the extended period of highly accommodative monetary policy
could eventually lead to a buildup of financial imbalances.

A few participants, however, mentioned the possibility that
economic growth could be more rapid than currently expected,
particularly if gains in output and employment led to a virtuous cycle
of improvements in household balance sheets, increased confidence, and
easier credit conditions. With respect to the outlook for inflation,
participants generally anticipated that inflation would recede further
over coming quarters and would settle over the medium run at levels at
or below those judged to be most consistent with the Committee’s dual
mandate. They pointed to the further dissipation of the effects of
earlier increases in the prices of energy and some commodities, the
significant slack in resource utilization, the continued subdued growth
in labor compensation, and well-anchored inflation expectations as
factors likely to contribute to the moderation in inflation over time.

A number of participants saw the risks to the outlook for inflation
as roughly balanced. A few participants felt that the continuation of
the current stance of monetary policy, coupled with the possibility of a
rebound in energy and commodity prices, posed some upside risks to
inflation. Other participants instead saw inflation risks as tilted to
the downside, in light of their expectations for persistent resource
slack. It was noted that U.S. inflation had been influenced relatively
more by commodity price fluctuations in recent years; because commodity
prices reflect global economic conditions, U.S. inflation might be less
affected by domestic factors and more linked to the global outlook than
in the past.

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

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