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Analysis from Econoday:

The minutes for the August FOMC meeting indicated that the Fed has a full plate even though policy rates were unchanged. The good news is that the Fed governors and District Bank presidents have increased confidence that the recession has bottomed and that growth is resuming in the second half of this year. Downside risks to the economy were seen as smaller. “Nonetheless, most participants saw the economy as likely to recover only slowly during the second half of this year, and all saw it as still vulnerable to adverse shocks.” The FOMC remained concerned about the consumer as labor market conditions were poor, credit conditions tight, and earlier declines in wealth continued to weigh on the consumer. But economic growth is expected to be supported by continuing monetary and fiscal policy stimulus, less-aggressive inventory cutting, and growth in exports.

Inflation is seen as subdued in the near term. But there was some disagreement over long-term inflation trends, notably related to the Fed’s ability to reign in expanded liquidity and federal budget deficits.

“Participants noted concerns among some analysts and business contacts that the sizable expansion of the Federal Reserve’s balance sheet and large continuing federal budget deficits ultimately could lead to higher inflation if policies were not adjusted in a timely manner. To address these concerns, it would be important to continue communicating that the Federal Reserve has the tools and willingness to begin withdrawing monetary policy accommodation at the appropriate time to prevent any persistent increase in inflation.”

While some participants said it is too early to declare victory over the current crisis, the financial system is seen to be remarkably improved from its recent worst.

“Developments in financial markets during the intermeeting period were again seen as broadly positive; the cumulative improvement in market functioning since the spring was viewed as quite significant. Markets for corporate debt continued to improve, and private credit spreads narrowed further.”

But as many commentators are warning, financial institutions are not yet out of the woods-more credit losses are likely.

“Nonetheless, several participants noted that banks still faced a sizable risk of additional credit losses and that many small and medium-sized banks were vulnerable to deteriorating performance of commercial real estate loans.”

The minutes also noted that the Fed again considered buying adjustable rate mortgage-backed securities to help lower mortgage rates.

By the end of the meeting, the FOMC decided to neither expand nor contract the current plan of asset purchases for the Fed’s balance sheet. Further decisions on the balance sheet were mostly postponed. The bottom line is that Fed policy is on hold, the economy is increasingly likely in recovery, but economic growth is likely to be sluggish. Markets had little reaction to release of the minutes.