Fed: The Recovery Has Stalled, but We Won't Help

What we can learn from new details released Tuesday on the central bank's June meeting

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The Federal Reserve just isn't sure what's going on. Although the minutes from its June meeting make some broad assertions about the U.S. economy, the economists appear to be squinting at a future clouded by uncertainty. Rather than dwell on any one thing the Fed concludes, here are ten takeaways from the discussion notes released Tuesday afternoon.

1. The Recovery Has Softened

We already knew this, but the Fed affirms our fears. It cites that pretty much every sector was having trouble in the second quarter, from housing to retailers to government to industrial firms. Its economists remain adamant that the recovery is moving forward, they just believe that the pace has weakened due to transitory factors. They didn't expect this, which is why their projections weakened.

2. Exit Strategy Is Clear

Over the past year or two, we've been provided clue after clue about how the Fed will wean the U.S. economy from the massive credit stimulus it has provided since the financial crisis. For the first time, however, the Fed minutes clearly and concisely explain the process. It will go something like this: 1) stop reinvesting maturing assets, 2) kill the language asserting that interest rates will remain extremely low for an "extended period" and begin draining reserves, 3) raise the fed funds rate and further tweak the level of reserves 4) begin selling mortgage securities. Only the timing of when its exit will commence remains unclear, both to us and the Fed.

3. The Exit Strategy Will Take Several Years to Fully Implement

Within that explanation, we learn that the last step won't be quick. The Fed says that it will take three to five years to sell all of its mortgage securities. And remember, that's the final step. So the exit process will probably last until at least 2015 and possibly past 2017.

4. U.S. Debt Ceiling Negotiations Are a Concern

In an unusual move, the minutes express the Fed's dissatisfaction with U.S. fiscal policy. Criticizing the debt ceiling situation, the economists warn that "even a short delay" on Treasury debt payments "would likely cause severe market disruptions and could also have a lasting effect on U.S. borrowing costs." June was the last chance for the monetary policy committee to voice its concern: its next meeting isn't set to occur until August 9th -- after the deadline that the Treasury has given for when it will run out of money if the ceiling isn't raised.

5. Inflation Is Not a Concern, Yet

Despite commodity prices jumping recently, most Fed economists remain unconcerned about longer-term inflation trends. But some of the inflation hawks on the committee were worried about rising prices. That means if some of the doves begin to question the stability of those longer-term tends, the Fed could quickly switch into contraction mode and begin soaking up excess money supply.

Presented by

Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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