The Fed Sees a Slower Recovery, but No Need to Change Course

The key theme in the Federal Reserve's minutes from its June 23-23 meeting is that the members are aware that the U.S. economic recovery is slowing, but at this juncture they don't see a need to respond with additional policy tactics.

First, the Fed's latest forecast: It lowered its 2010 GDP growth forecast to 3% to 3.5% from April's 3.2% to 3.7% projection. And it narrowed its 2011 GDP forecast to 3.5% to 4.2% from April's 3.4% to 4.5%.

On unemployment, the Fed now expects a 2010 jobless rate of 9.2% to 9.5%, up slightly from the 9.1% to 9.5% April forecast, and a 2011 jobless rate of 8.3% to 8.7%, up from the 8.1% to 8.5% April forecast.

On inflation, the central bank now sees 2010 core-PCE inflation (personal consumption expenditure, a measure the Fed closely watches) of 0.8% to 1%, down from April's 0.9% to 1.2% forecast, and for 2011 it sees core-PCE inflation of 0.9% to 1.3%, down from April's 1% to 1.5% forecast.

A Softer Expansion, But No New Action Yet

The Fed noted that the economic expansion is getting softer, but it added that "the changes to the outlook were viewed as relatively modest and as not warranting policy accommodation beyond that already in place."

However, the Fed appeared to leave the door open to additional policy action, if conditions warranted. At the same time, it suggested that the bar is significant concerning implementing additional steps to stimulate the economy -- i.e. that considerably more evidence of a deteriorating economy would be needed before the Fed would act further.

Specifically, the Fed said: "However, members noted that in addition to continuing to develop and test instruments to exit from the period of unusually accommodative monetary policy, the Committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably."

That statement also makes clear that the Fed is prepared to deal with the reverse -- a sudden (and unexpected) surge in U.S. GDP growth.

No Double-Dip, But Unemployment Is Too High

Worth noting also: No Fed policymakers forecast a double-dip recession in the June minutes, but they expect the pace of hiring "to remain low for some time." The Fed said it expected unemployment "to remain noticeably above its long-run sustainable level for several years, and participants expressed concern about the extended duration of unemployment spells for a large number of workers."

In sum, the June minutes show a Fed agreeing that an economic slowdown has occurred, but that the evidence isn't sufficient enough, from a macroeconomic standpoint, to warrant a change in monetary policy. Further, the Fed sees inflation trending lower, but as of this juncture doesn't see the threat of deflation -- a protracted reduction in prices and wages -- as imminent.