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Divided Fed warns on ‘sluggish’ recovery

The US Federal Reserve expressed worry about a “sluggish” economic recovery Tuesday, according to minutes of an August meeting that highlighted divisions within the bank’s top rate-setting panel.

Although members of the Federal Open Market Committee expected the recovery to pick up pace in 2011, details from the August 10 gathering showed concern about a return to modest crisis-era measures to stimulate growth.

Faced with tepid news from the employment and housing sectors and evidence that the recession had been deeper than previously thought, members of the Fed’s rate-setting panel warned the short-term outlook remained bleak.

“The softer tone of incoming economic data suggested that the pace of the expansion would be slower over the near term than previously projected,” the central bank said.

“Real GDP growth was noticeably weaker in the second quarter of 2010 than most had anticipated, and monthly data suggested that the pace of recovery remained sluggish going into the third quarter,” the minutes said.

At a meeting in June, the Fed had already revised its growth estimates downward to between 3.0 and 3.5 percent for this year.

“All in all, the committee became… more pessimistic on the US economic recovery,” said Thomas Julien an economist with Natixis.

Against this backdrop, the bank said “all but one member” had agreed on the need to reinvest the proceeds from mortgage-backed securities into long-term US Treasury bonds, effectively sustaining some crisis-era spending.

But divisions about the impact these measures would have in stimulating the economy or on investor confidence were evident from the minutes.

There were also doubts about the reasons why the long-lingering crisis continues to grip the US economy, with some members reporting that hiring was slow to restart because of uncertainty about government regulation.

“A number of participants reported that business contacts again indicated that uncertainty about future taxes, regulations, and healthcare costs made them reluctant to expand their workforces.”

Others argued that the lag was due to “mismatches between unemployed workers skills and the needs of employers.”

Members also appeared split on why consumers were not flocking back to the shops, with some arguing that households were still repairing their finances, while others argued timid Americans will continue to save more than before.

“Participants recognized that the implications of these new data for the outlook were unclear,” the minutes said.

But Fed members sounded one optimistic note, stating that financial conditions “became somewhat more supportive of economic growth.”

While growth is expected “to be more modest in the near term, participants continued to anticipate that growth would pick up in 2011.”

The Fed in June predicted the economy would grow 3.5 to 4.2 percent next year.

But the divisions within the Fed are unlikely to make their task in the future any easier.

“Clearly the FOMC has a formidable job cut out for it in terms of coaching the recovery back to full strength over the next several quarters,” said Brian Bethune of IHS Global Insight.

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