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Fed: Economy Still Weak Despite Improvements

First Posted: 01/04/11 03:42 PM ET Updated: 05/25/11 07:25 PM ET

After Christmas Shopping

WASHINGTON (By Pedro da Costa and Mark Felsenthal) - Federal Reserve officials in December felt the U.S. economic recovery was still weak enough to warrant monetary support despite growing signs of strength, Fed meeting minutes released on Tuesday showed.

Wall Street economists have been busy revising up their forecasts for economic growth in recent weeks on the back of signs showing business activity and consumer spending picking up steam.

But the Fed's policy-setting panel, which at its December 14 meeting made no changes to a $600 billion bond-buying program first announced in November, was much less sanguine.

The minutes did suggest the central bank is counting on a short-term boost to growth from the recent tax cut deal between President Barack Obama and Republicans in Congress.

However, the minutes of the meeting showed policymakers are also still worried about risks to growth, including anemic hiring and a battered housing sector, which has been flirting with a renewed slump.

"Even with the positive news received over the intermeeting period, the most likely outcome was a gradual pickup in growth with slow progress toward maximum employment," the minutes said.

"The recovery (remains) subject to some downside risks," they added, citing housing and debt troubles in Europe as potential trouble spots.

The U.S. economy, having emerged from its deepest recession in generations in the summer of 2009, has expanded in fits and starts since. Gross domestic product rose at a 2.6 percent annual rate in the third quarter, a pace still seen as too low to bring down the country's 9.8 percent jobless rate.

The rather dovish tone of the minutes suggested those thinking the central bank might curtail its controversial bond-buying plans, known in the markets as the second round of quantitative easing or QE2, may be getting ahead of themselves.

Some Fed officials indicated a "fairly high" threshold for reconsidering the $600 billion in purchases, and some noted more time was needed before any such re-evaluation.

"Members generally felt that the change in the outlook was not sufficient to warrant any adjustments to the asset-purchase program," the minutes said.

Copyright 2010 Thomson Reuters. Click for Restrictions.

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Filed by Nicole Hardesty  |