With the U.S. economy still running below potential and the rest of the world presenting ample challenges to growth, this week's release of minutes from the Federal Reserve's July policy-making meeting should garner a lot of interest among economists and market participants. I see five areas where the minutes can provide insight into how officials perceive the balance of risks and what actions they might take.
All told, I expect the minutes to portray a U.S. economy strong enough to withstand external headwinds, but still struggling to operate at full capacity and regain its longer-term potential. Although the Fed will stick to a cautious, measured and data-dependent approach, admitting that there are still areas of analytical uncertainty, this will not necessarily mean that it will signal inaction.
There's a growing recognition, at the Fed and elsewhere, that expectations of an even more prolonged period of ultra-low interest rates can undermine the integrity, soundness and effective operation of the financial system. Hence, the Fed will leave the door open for a rate increase in September, and open much wider for December -- in hopes that the country’s policy regime may move away from excessive reliance on the central bank toward a more comprehensive response including more balanced demand management measures, structural reforms to amplify the economy's dynamism, actions to address pockets of over-indebtedness and much better global coordination.
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