• Recent data reflects moderate economic recovery and strengthening labor markets
  • Primary challenges lie in personal consumption and residential real estate
  • Official interest rates remain unchanged at 0%-0.25%

FOMC members agreed that the economy is strengthening and the labor market is starting to improve in line with their expectation of moderate growth. In fact, at this meeting, participants submitted projections for economic growth. The average of the central tendency moved up to 3.5% in 2010 from 2.5%, indicating that members are feeling more confident about the strength of the recovery. On this point, members’ concerns about a stimulus driven recovery are easing as, “growth in real GDP appeared to reflect a strengthening of private final demand and not just fiscal stimulus and a slower pace of inventory decumulation.”

Participants agreed that one of the most positive developments was an improvement in the labor market and they expect the progress to continue, which could lead to further gains in spending by boosting consumer and business confidence. Nonetheless, concerns remain about the high unemployment rate, the loss of skills due to long-term unemployment and uncertainty about the economic outlook that remains in the business community (according to business contacts).

Another positive development was business investment, which members expect to be supported by improved conditions in financial markets. The credit markets have opened up as a source of financing for large firms. Nevertheless, small firms continue to face challenges obtaining bank loans. FOMC members view this as an obstacle to the economy because small companies have been drivers of job growth during previous recoveries.

Despite the improvement in the outlook, committee participants emphasized that downside risks remained. Consumer spending has been strong in recent months, but it could be supported by pent-up demands and other temporary factors, which raises the question of if it will be a significant driver of economic growth going forward. Moreover, members remained concerned that home sales and housing starts have stabilized at low levels, and that more foreclosures could raise inventory levels further and put downward pressure on home prices.