WASHINGTON (MNI) – The following is the second and final part of an
excerpt from the minutes of the Federal Open Market Committee’s August
10 monetary policy meeting published Tuesday, regarding the
participants’ views on current conditions and the economy’s outlook.
Members said information being received is indicating a “slowing in the
pace of recovery”:

The incoming data on the labor market were weaker than meeting
participants had anticipated. Privatesector payrolls grew sluggishly in
recent months. The unemployment rate declined a bit, but that reflected
a decrease in labor force participation rather than an increase in
employment. Policymakers discussed a variety of factors that appeared to
be contributing to the slow pace of job growth. A number of participants
reported that business contacts again indicated that uncertainty about
future taxes, regulations, and healthcare costs made them reluctant to
expand their workforces. Instead, businesses had continued to meet
growth in demand for their products largely through productivity gains
and by increasing existing employees’ hours.

Several participants suggested that structural factors such as
mismatches between unemployed workers’ skills and the needs of employers
with job openings, or unemployed workers’ inability to move to a new
locale, were contributing to the elevated level and long average
duration of unemployment. Other participants, while agreeing that such
factors could restrain job growth and contribute to high rates of
unemployment, noted that employment was lower than a year earlier and
that job openings were only slightly above their lowest level in 10
years, indicating that few firms saw a need to add employees. Most
participants viewed weak demand for firms’ outputs as the primary
problem; they saw substantial scope for stronger aggregate demand for
goods and services to spur employment in a wide range of industries.

Weighing the available information, participants again expected the
recovery to continue and to gather strength in 2011. Nonetheless, most
saw the incoming data as indicating that the economy was operating
farther below its potential than they had thought, that the pace of
recovery had slowed in recent months, and that growth would be more
modest during the second half of 2010 than they had anticipated at the
time of the Committee’s June meeting. Some policymakers whose forecasts
for growth had been in the low end of the range of participants’ earlier
projections viewed the recent data as consistent with their earlier
forecasts for a weak recovery.

A few participants, observing that month-to-month data releases are
noisy and subject to revision, did not see the recent data as clearly
indicating a change in the outlook. Many policymakers judged that
downside risks to the U.S. recovery had become somewhat larger; a few
saw the incoming data as suggesting a greater risk that private demand
for goods and services might not grow enough to offset waning fiscal
stimulus and a smaller impetus from inventory restocking. In contrast,
most saw a reduced risk of financial turmoil in Europe and attendant
spillovers to U.S. financial markets.

Policymakers generally saw the inflation outlook as little changed.
They observed that a range of measures continued to indicate subdued
underlying inflation and that growth in wages and compensation remained
quite moderate. Many said they expected underlying inflation to stay,
for some time, below levels they judged most consistent with the dual
mandate to promote maximum employment and price stability. Participants
viewed the risk of deflation as quite small, but a number judged that
the risk of further disinflation had increased somewhat despite the
stability of longer-run inflation expectations.

One noted that survey measures of longer-run inflation expectations
had remained positive in Japan throughout that country’s bout of
deflation. A few saw the continuation of exceptionally accommodative
monetary policy in the United States as posing some upside risk to
inflation expectations and actual inflation in the medium run.

(2 of 2)

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

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