05/19/2010 04:10 pm ET | Updated May 25, 2011

Fed Boosts Projections For Recovery, Though Substantial Pitfalls Remain

The nascent economy recovery taking shape from February to April boosted top policymakers' projections for the year, causing them to increase their output estimates and lower their unemployment projections, according to Federal Open Market Committee meeting minutes released Wednesday.

The 12 presidents of the regional Federal Reserve banks and the five members of the Fed's Board of Governors decreased their unemployment projection formed in January from a range of 9.5-9.7 percent to 9.1-9.5 percent, minutes from the panel's April 27-28 meeting show. Estimates for the nation's total output, otherwise known as gross domestic product [GDP], increased from a range of a 2.8-3.5 percent increase to a 3.2-3.7 percent increase. These estimates exclude the three highest and three lowest projections:

"[O]n balance, the economic recovery was proceeding at a moderate pace and... the deterioration in the labor market was likely coming to an end," the minutes read, noting a continued rise in consumer spending, business investment and manufacturing output.

"Participants agreed that the growth in real GDP appeared to reflect a strengthening of private final demand and not just fiscal stimulus and a slower pace of inventory decumulation; this welcome development lessened policymakers' concerns about the economy's ability to
maintain a self-sustaining recovery without government support," according to the minutes.

In other words, the rise in demand isn't just due to the Obama administration's extraordinary stimulus programs and businesses burning through their inventory -- more goods were produced and consumers and businesses were buying them up. Because of that, top Fed officials aren't as concerned about the recovery being solely reliant on government support.

But pitfalls remain.

Residential construction was "still depressed"; construction of nonresidential buildings continued to be on a "steep downward trajectory"; and the rise in home sales was "likely boosted, at least in part, by the anticipated expiration of the homebuyer tax credit," according to the meeting minutes. The homebuyer tax credit -- worth up to $8,000 -- ended a few days after the Fed's meeting.

"Some participants saw the possibility of elevated foreclosures adding to the already very large inventory of vacant homes as posing a downside risk to home prices, thereby limiting the extent of the pickup in residential investment for a while," the minutes noted, as Fed officials expressed caution over the rise in foreclosures and their impact on home prices.

Additionally, the recent increase in consumer spending "appeared to be supported importantly by pent-up demands and possibly by other temporary factors, such as unusually large income tax refunds," the meeting participants noted.

In another cautionary note, the Fed officials indicated that "it seemed unlikely that consumer spending would be the major factor driving growth as the recovery progressed."

Consumer spending accounts for about 70 percent of the U.S. economy.

State and local governments, facing decreased tax revenue and fighting against budget deficits, "continued to retrench."

For all the gains in employment (more people are working now versus earlier in the year), "finding a job remained very difficult, and the average duration of unemployment spells increased further." It's now at a record of just over 30 weeks.

Fed officials "remained concerned" about the high unemployment rate, currently at 9.9 percent, noting the "high levels of long-term unemployment and permanent separations, which were seen as potentially leading to the loss of worker skills and greater needs for labor reallocation that could slow employment growth going forward."

They also said that information from business contacts "generally underscored the degree to which firms' reluctance to add to payrolls or start large capital projects reflected uncertainty about the economic outlook and future government policies."

The economic recovery "could eventually lose traction without a substantial pickup in job creation," Fed officials noted.

Also, while banks "indicated a somewhat greater willingness to lend to consumers in recent months, terms and standards on consumer loans remained restrictive," the minutes note. Bank credit diminished again in March, and was "still contracting."

Consumers continued to pay higher rates, though, as credit card interest rates rose more than the yield on two-year Treasuries. The yield was 0.87 percent as of the day after the panel's previous meeting, Jan. 28, and had risen to 1.03 percent on the two days the Fed officials met, April 27-28, according to Treasury Department data.

"[S]preads of interest rates on credit cards over yields on two-year Treasury securities continued to drift upward," according to the minutes. In other words, the difference between credit card rates and those yields widened, so consumers were paying more.

And while large companies with access to capital markets "appeared to be having little difficulty in obtaining credit," smaller firms "reportedly continued to face substantial difficulty in obtaining bank loans," according to the minutes.

"Because such firms tend to be more dependent on commercial banks for financing, participants saw limited credit availability as a potential constraint on future investment and hiring by small businesses, which normally are a significant source of employment growth in recoveries," the minutes noted.

READ the full minutes: