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Fed Applauds Recovery, Cautiously

According to minutes released today from an FOMC meeting in August, Fed officials struck a positive tone despite lingering concerns.
Author:

WASHINGTON (

TheStreet

) -- Federal Reserve officials can see the light at the end of the economic recovery tunnel. But they know risks remain.

Those were the takeaway sentiments bandied about by Fed officials, according to minutes released today from their Open Market Committee meeting in August. A much ballyhooed statement released then gave an inkling of the Fed's upbeat economic assessment when the group signaled that economic activity was "leveling out" and its $300 billion Treasury securities purchase program would be winding down by the end of October. Today's minutes added some color to that assessment.

"Meeting participants agreed that the incoming data and anecdotal evidence had strengthened their confidence that the downturn in economic activity was ending and that growth was likely to resume in the second half of the year," the minutes said.

Though officials see an uptick in 2010, there was some disagreement at the confab about just how strong the economic recovery would be, with unemployment, consequent sluggish consumer spending and weak credit conditions as likely culprits to slow down growth.

Nonetheless, both in the minutes and the statement, the Fed noted that it will maintain its key interest rate at near zero for "an extended period." Bill Hampel, chief economist for the Credit Union National Association, anticipates that decision may translate into an interest rate bump in the middle of next year, if other factors stay in check.

"The Fed does a good job of being apolitical, but they're still in Washington, so I find it unlikely that they'll raise the fed funds rate until employment improves," Hampel said. "Don't expect the fed funds rate to increase till next summer."

Still, Fed minutes showed that many officials remained cautious, noting the economic recovery would be slow during the latter half of the year while all of them saw an economy still "vulnerable to adverse shocks."

In particular, the group felt that financial markets were improving thanks to government programs, but many were concerned that "markets were still strained and financial risks remain" as those same programs begin to unwind. More importantly, several in the group related concerns that banks faced "sizable risks of additional credit losses" and many were still left "vulnerable to deteriorating performance of commercial real estate loans."

No decision was made on the Fed's mortgage-backed securities and agency debt programs at the August meeting. But the minutes did note that many saw the strategy for the Treasury securities as "helpful in the future as those programs approach completion."

Elsewhere in the financial sector, shares of

Bank of America

(BAC) - Get Report

were slightly down in the afternoon by 8 cents at $16.37, while

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Citigroup

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shares were just a hair higher by 2 cents at $4.56.

MasterCard

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added 43 cents at $201.10, as

Visa

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was flat after putting on 1 cent to $70.19.

-- Written by Sung Moss in New York

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