The latest minutes from the U.S. Federal Open Market Committee betray a slightly rosier economic outlook, but not enough to move the needle on monetary policy, economists say.

RBC Economics says that the minutes of the December 14, which were released Tuesday, “provided a slightly more upbeat assessment of the near term outlook,” although it notes that as the improvement was considered ‘modest’, the Fed governors didn’t see fit to alter policy.

TD Economics reports that the review of the economic outlook contained in the minutes states that the tax package agreed before the holidays will boost the level of real GDP in 2011 and 2012, but also stresses that the depressed housing market will continue to be a drag on GDP growth. There are also signs that the labour market is improving, but hiring remains weak, TD says.

“The minutes of the December meeting hammered home that the Fed still saw significant risks to the outlook and viewed the progress on inflation and employment as likely to remain slow even against a mildly improved outlook for growth,” RBC says.

“Our assessment is that recent economic reports indicate that the U.S. economy pulled out of the doldrums in the final quarter of 2010 with the growth rate forecast to come in around 3.5%, the fastest pace since the first quarter of the year. Furthermore, we expect the economy’s momentum to accelerate as the government’s tax package bolsters consumer activity and businesses keep investing in capital goods,” RBC says. “While the labour market has lagged the revival in activity, we anticipate that hiring will pick up pace resulting in a slow decline in the unemployment rate.”

Nevertheless, RBC says that it still sees little chance of the Fed being in position to raise interest rates this year, given its assessment that inflation will remain below the level consistent with their mandate “for some time.”

“Rather, should the economy build momentum as expected, we look for the process of reducing policy stimulus to begin with the expiry of the asset purchase program, followed by the ending of the program to reinvest the proceeds of maturing holdings and eventually, the sale of bonds held by the Fed. Assuming that the unwinding of these measures does not jar the economy from its stronger growth path, rate hikes are likely to follow in early 2012,” RBC concludes.

TD also indicates that it doesn’t foresee major changes to US monetary policy in the near term. It expects the Fed to go through with the full $600 billion in Treasury bond purchases that it announced, but not to go beyond that. With considerable risks on both the upside and the downside, policymaking is both more difficult and more risky, TD says.

“Given this uncertainty, the Fed appears biased towards a ‘wait and see’ approach,” TD says. “The main objective of the asset purchase program is improved economic growth that lowers unemployment rate and stabilizes prices. As long as progress is being made on these fronts, the Fed is likely to maintain its current policy stand.”

IE