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Economic Recovery Doesn't Satisfy Fed as Stocks Soar Higher

NEW YORK (TheStreet) -- U.S rates will likely stay low as the Federal Reserve remains unsatisfied with the pace of economic recovery.

On Wednesday, the minutes from the Fed's meeting from July 29 to 30 were released, showing that policymakers "generally agreed" that the economy was improving -- but not enough.

The Fed said that the labor market improvement was "greater than expected" over the last year, but that "significant" slack remained.

Slack in the labor market can be measured by the decline in labor force participation, a large number of part-time jobs relative to full-time jobs and the tepid recovery of wages.

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The Fed's acknowledgement of the need for improvement in the economy comes a day after the consumer inflation figure edged slightly higher.

The Labor Department said on Tuesday that its Consumer Price Index edged up 0.1% in July after increasing 0.3% in June.

Labor market slack, marked by tepid wage growth, has also adversely affected increases in consumer prices. Even as energy prices have risen, the level of overall inflation has not considerably picked up.

The chart below shows the historical relationship between the CPI figure and the Fed Funds rate. Since 1954, the Fed Funds rate has tracked consumer inflation fairly closely.

Inflation has risen off of its lows in 2009, but remains stuck between an annual acceleration of 0% and 2% since 2012.

Data provided by The St. Louis Federal Reserve

So how should investors respond?

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Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

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