Celebrate (maybe)! Fed says economy has likely turned a corner

Federal Reserve officials last month felt optimism about the U.S. economy and expressed belief that a nearly two-year-long recession was drawing to close. Still, the group suggested that the U.S. remains vulnerable to shocks, according to minutes from the August 11-12 meeting released Wednesday.

A number of factors led the Federal Open Market Committee to conclude that the recession is nearing an end. The FOMC noted that reports suggested economic activity was stabilizing, that the pace of job cuts slowing "noticeably in recent months," and that car production and housing activity had picked up.
Most officials nonetheless expect the economy to recover slowly during the remainder of the year, as consumers still face challenges and consider purchases carefully, according to the minutes. Many FOMC members noted that "households still faced considerable headwinds, including reduced wealth, tight credit, high levels of debt and uncertain job prospects," the minutes said.

With such factors at work, the group concluded that consumer spending would be limited to no more than moderate growth and questioned whether tight credit markets would continue to lead consumers to save, following a trend in recent quarters.

Fed officials were "less worried that they were too optimistic about a second half recovery," said Bill Hampel, chief economist at Credit Union National Association. Hampel told MarketWatch it was likely that the recovery "will not be too much to write home about," given the high debt-burden facing consumers.

One outcome of the meeting was the Fed's decision to stand firm on interest rates, maintaining them at 0 to one-fourth of a percent. The group noted that economic conditions are likely to warrant "exceptionally low levels of the federal funds rate for an extended period of time."

Fed officials said they expected the pace of recovery to pick up next year, even as those views were tempered by concern about household spending. The minutes showed that the Fed's stance on inflation remained unchanged from that of the June meeting, when views of an economic rebound were far less certain.

Still, the group concluded that although "the underlying pace of core inflation seemed to be running a little higher than ... anticipated, survey measures of inflation expectations showed no significant change."
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