Key Points from Fed Minutes

Today, the Fed released the minutes of its meeting held in mid-August. Overall, the Fed saw that overall economic activity was starting to stabilize, but that the depth of the recession had been much worse than originally thought. Here are some of the key points:

•   Employment continued to move lower through July, but the pace of job losses had slowed noticeably in recent months.
•   Consumer spending dropped only a little further in the first half of this year, on balance, after falling sharply in the second half of last year.
•   The decline in equipment and software (E&S) investment seemed to be moderating, although the incoming data did not point to an imminent recovery.
•   The contraction in industrial production slowed markedly in the second quarter, although the rate of decline remained rapid and the factory utilization rate recorded a new low in June.
•   The weak labor market continued to place significant strains on household income, and earlier declines in net worth were still holding back spending.
•   In May, the U.S. international trade deficit narrowed to its lowest level since 1999, as exports increased moderately and imports declined.
•   Recent indicators of economic activity in the advanced foreign economies suggested that the pace of contraction in those countries moderated further.
•   Functioning in short-term funding markets generally showed further improvement.
•   The staff expected core PCE inflation to slow substantially.

Overall, the tone of the minutes is that we have hit bottom but the recovery is going to be anemic. With other economies also starting to stabilize, we might get some help from exports.

Inflation is not an immediate problem -- unemployment is. This is particularly true of core inflation; the huge amount of slack in the system will keep inflation in check.

The weak job market will prevent the wage side of a wage-price spiral from gaining any traction. The financial markets are largely back to normal in terms of credit spreads.

Fears about the solvency of major banks like Bank of America (BAC - Analyst Report) and Citigroup (C - Analyst Report) have largely subsided, although much of that is due to accounting rule changes.

However, unlike a year ago, banks are no longer afraid to lend to each other in the short-term funding markets. Banks are still tightening their lending standards, but not as quickly as they were earlier in the crisis.

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