WASHINGTON (MNI) – The following is the first part of the text of
the Participants’ Views On Current Conditions and the Economic Outlook
portion of the Minutes of the June Federal Open Market Committee
meeting, released Wednesday, July 11:

In conjunction with this FOMC meeting, meeting participants- the 7
members of the Board of Governors and the presidents of the 12 Federal
Reserve Banks, all of whom participate in the deliberations of the
FOMC-submitted their assessments of real output growth, the unemployment
rate, inflation, and the target federal funds rate for each year from
2012 through 2014 and over the longer run, under each participant’s
judgment of appropriate monetary policy. The 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 to the economy.
These economic projections and policy assessments 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,
participants agreed that the information received since the Committee’s
previous meeting suggested that the economy had continued to expand
moderately, though many noted that a variety of indicators showed
smaller gains than had been anticipated. Growth in employment, in
particular, appeared to have slowed in recent months, and the
unemployment rate remained elevated. Business fixed investment had
continued to advance, and household spending appeared to be rising at a
somewhat slower pace than earlier in the year. There were further signs
of improvement in the housing sector, but the level of activity remained
very low. Volatility in financial markets increased over the
intermeeting period, and investors’ appetite for riskier assets
declined, likely in response to heightened fiscal and financial strains
in Europe as well as some weakerthan- expected incoming data about the
U.S. economy and foreign economies. Inflation had slowed somewhat,
mainly reflecting the decline in the prices of crude oil and gasoline in
recent months, and longerterm inflation expectations remained stable.

Participants generally interpreted the information that became
available during the intermeeting period as suggesting that economic
growth would most likely remain moderate over coming quarters and then
pick up very gradually. Most participants saw the incoming information
as indicating somewhat slower growth in total demand, output, and
employment over coming quarters than they had projected in April, and
most carried forward some of that downward revision to their projections
of medium-term growth. However, some participants judged that the recent
weakness in a variety of economic indicators was more likely to prove
transitory, and thought that the outlook beyond this year was
essentially unchanged. Reflecting the projected moderate pace of growth
in production and em- ployment, most participants anticipated that the
unemployment rate would decline only slowly. A number of factors
continued to be seen as likely to limit the economic expansion to a
moderate pace in the near term; these included slow growth or even
contraction in some major foreign economies, ongoing and prospective
fiscal tightening in the United States, modest growth in household
income, and-despite some recent signs of improvement-continued weakness
in the housing sector. As in April, participants expected that most of
the factors restraining economic expansion would ease over time, and so
anticipated that the recovery eventually would gain strength. However,
strains in global financial markets, which stemmed primarily from fiscal
and banking concerns in Europe, had become more pronounced over the
intermeeting period and continued to pose significant downside risks to
the economic outlook; the possibility of a sharper-thananticipated
fiscal tightening in the United States also posed a downside risk.
Looking beyond the temporary effects on inflation of this year’s
fluctuations in oil and other commodity prices, almost all participants
continued to anticipate that inflation over the medium-term would run at
or below the 2 percent rate that the Committee judges to be most
consistent with its statutory mandate. In one participant’s judgment,
appropriate monetary policy would lead to inflation modestly greater
than 2 percent for a time in order to bring unemployment down somewhat
faster. Some participants indicated that they saw persistent slack in
resource utilization as posing downside risks to the outlook for
inflation; a few participants judged that the highly accommodative
stance of monetary policy posed upside risks to the medium-term
inflation outlook.

In discussing the household sector, meeting participants noted that
real personal consumption expenditures had continued to expand despite
weak growth in real disposable income, but that the pace of expansion
appeared to have slowed since earlier this year. A few participants
expressed concern that slow growth in employment and low levels of
consumer confidence would further restrain consumer spending. Many
participants, however, said that business contacts had reported that
consumer spending was holding up. Several observed that recent declines
in gasoline prices would increase households’ real incomes and could
boost consumer spending in coming quarters. More broadly, improving
household balance sheets and a diminishing drag from household
deleveraging were seen as likely to help support rising household
expenditures over time.

Indicators of home sales, construction, and prices suggested some
improvement in the housing sector. However, not all regions shared in
the gains, and the sector remained depressed overall. Most participants
anticipated that housing markets were likely to recover only slowly over
time, in part because tight credit standards in mortgage lending meant
that low mortgage rates were now generating less of a pickup in home
sales and construction than had been the case during the recoveries from
earlier recessions. A few participants were more sanguine about the
potential for a sizable upturn in housing activity. Still, with
residential investment currently a much smaller share of real GDP than
during past recoveries, the housing sector seemed unlikely to contribute
substantially to a stronger economic recovery.

Anecdotal evidence from business contacts indicated that activity
in the energy and agriculture sectors continued to advance in recent
months. Information from manufacturing and transportation firms was
generally less optimistic than earlier in the year. There were a number
of reports of slowing sales to Europe and Asia. Contacts in some parts
of the country also indicated that firms had become more cautious in
their hiring and investment decisions, with most capital investment
being undertaken to improve productivity and reduce costs rather than to
expand capacity. Some participants cited examples of business contacts
saying that heightened uncertainty about future tax and regulatory
policies had led them to put potential investment projects on hold until
the uncertainty is resolved.

** MNI Washington Bureau: 202-371-2121 **

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