The Federal Reserve Minutes from the August 11-12 meeting show the FOMC remains confident of economic recovery while dismissing some concerns evident in lower household income. The group commented that consumer spending “had been on the soft side lately” and that “new estimates of real disposable income…showed a noticeably slower increase in 2008 and the first half of 2009 than previously thought.” Staff added that while this would normally lead to downward revisions in consumer spending estimates, the weakness is offset by higher household wealth, lower rates and spreads, and weakness in the dollar. Equities have indeed rallied sharply, with gains of around thirty percent off the March lows. Despite this, the Fed’s assumptions may have to be reconsidered should markets decline in September and earnings in the third quarter disappoint. Recently, markets have fallen several percentage points from recent highs with foreign weakness more evident as China’s Shanghai is down nearly 22% from its early August peak. Ultimately, consumers remain a uncertain section of the economy as job losses continue to rise while their effect on loan losses cannot be fully measured.
Other comments made in the minutes include the notion that while inventory cuts have been significant, the ratio to sales remains high. Also discussed, the Term Asset-Backed Securities Loan Facility (TALF), was recommended to see an extention through 2010 that was finally granted a week later. The Federal Reserve saw total assets nearly unchanged at approximately two trillion with gains from treasury purchases offset by nearly equal declines in usage of credit/liquidity facilities. Also of note, the agency considered tackling the high rate spread in Adjustable-Rate Mortgage loans through purchasing of securities, but decided to refraim from making a decision on the matter.
Markets today remain mixed with little reaction from equities while US dollar saw weakness across most majors, while gold climbed more than two percent to above $980 per troy ounce for the first time since June 5.