Fed Minutes: Signs of Improvement

Highlights include Zions Bancorporation (ZION - Analyst Report), J.C. Penney Co., Inc. (JCP - Analyst Report) and Nordstrom, Inc. (JWN - Snapshot Report).

The minutes of the Apr 28-29 Fed meeting confirmed what many of us have been observing -- the rate of economic deterioration is slowing.

In describing the economy, meeting participants opined, "The pace of decline in some components of final demand appeared to have slowed recently." In layman’s terms, this means the economy is still going downhill, but as not as quickly as before.

Because of this, the Fed revised its forecast for economic growth to reflect a comparatively more optimistic outlook. The central bank expects real GDP to "edge higher in the second half and then increase moderately next year."

However, the Fed also warned that growth would be restrained over the foreseeable future. It particularly cited financial services and housing as sectors that "might well account for a smaller share of the economy in coming years." This is not good news for companies like Zions Bancorporation (ZION - Analyst Report), target areas hardest hit by the housing bust.

Furthermore, the Fed predicted that the unemployment rate could continue to rise into the early part of 2010. This would have a dampening effect on consumer spending and would be a negative for retailers such as J.C. Penney (JCP - Analyst Report) and Nordstrom (JWN - Snapshot Report).

Finally, there was disagreement about expanding the Fed’s balance sheet. Some members suggested expanding balance sheet further, though they wanted to see how the economy performs first. There was also discussion that the balance sheet "might not be reversed in a sufficiently timely manner" to stop inflation from rising.

Overall, the minutes did not contain any surprises or any truly new information that should influence your trading strategy. The economy will recover, but the pace of growth will be slow. More importantly, though the economy is getting better, we’re not out of the woods yet.

The minutes are available on the Fed’s web site:
http://www.federalreserve.gov/monetarypolicy/fomcminutes20090429.htm