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

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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.

6. No Chance of More Monetary Stimulus, Yet

In June, the Fed's second round of monetary stimulus officially ended. The minutes indicate that the economists broadly agree that denying the financial markets additional support was the right move. But some of those economists also appear ready to stop back in with another round if the recovery continues to soften. As of late June, the evidence wasn't strong enough to make the case for more intervention, however.

7. Uncertainty Divides the Fed

You might have noticed that the Fed economists disagree on some very basic issues. Some fear inflation, while others worry about unemployment. If higher inflation stubbornly persists and the unemployment rate refuses to decline, then we could be in for a battle at the Fed. Throughout 2011, all policy decisions have been unanimous, but that could change in the months to come.

8. Low Inflation Required for More Stimulus

For that reason, the minutes appear to imply that we'll have to see inflation decline significantly before the Fed economists will consider additional monetary stimulus. In November, when the last round of easing was announced, inflation was much lower. Anemic job growth alone won't be enough for the Fed to take more action.

9. Little for the Market to Grapple Onto

What should the market make of the minutes? The Fed says it thinks the recovery is still on track, but weaker. But generally, its economists appear to disagree on what the future holds. It probably won't provide any more stimulus, but doing so isn't out of the question. If the market is looking for certainty, it won't get any from the Fed. 

10. August 9th Should Provide a Very Interesting Meeting

All of these observations lead to one, clear conclusion: we could see fireworks at the next Fed meeting. About seven weeks will have passed since its June meeting, and a lot can happen over that long of a period of time in a fragile economy. Prior to the June meeting, we had just one month of clearly weak economic reports. By August 9th, we could have three months' worth. At that time, we'll also probably know if inflation has continued to rise or has slowed. It's also set to occur a week after the debt ceiling could be punctured if Congress doesn't raise it. We can only imagine how concerned the Fed could be at that time if we've got three months of virtually nonexistent job growth with climbing inflation in the context of an effective U.S. default.

Image Credit: REUTERS/Jason Reed

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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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