The minutes of the Federal Open Market Committee's (FOMC) Aug. 4-5 meeting show that board members "did not see the current stance of policy as particularly accommodative." It also revealed that most members anticipate the next policy move to be a tightening of rates, but the timing and extent of any change would depend on evolving developments.

The FOMC agreed that while real GDP in the second quarter was higher than anticipated, the labour market continued to "weaken significantly, financial conditions remained unfavorable, consumer and business confidence was downbeat, and manufacturing activity was contracting."

"A number of participants worried about the possibility that core inflation might fail to moderate next year unless the stance of monetary policy was tightened sooner than currently anticipated by financial markets," the minutes read.



Commenting on the June 25 meeting when the Fed also held rates at 2.00%, the minutes read: "Although the decision was largely anticipated, the policy statement was reportedly viewed by investors as placing more emphasis on the downside risks to growth than they had anticipated."

The Committee expected inflation to moderate later this year and the next, but conceded that forecasts are uncertain and there are "significant concerns about the upside risks" going forward. "[I]n light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remained high."

On growth, the FOMC staff said overall activity is expected to be weak until a modest recovery begins next year. Nearly all members saw continuing downside risks to growth.

The committee recognized that export growth has "provided substantial impetus to overall demand" but that this could decelerate as "some foreign economies would tend to dampen export gains going forward."

The staff marked down their forecast of real GDP in the second half of 2008 and said they expect that real GDP would rise at "less than its potential rate through the first half of next year" before recovering fully in the second half as housing activity normalizes and financial conditions become "less restrictive."

On the labour market, the minutes reveal that the FOMC believes employment conditions will continue to soften.

"The unemployment rate jumped during the intermeeting period, and participants generally anticipated that payroll employment would decline further in coming months," the minutes read.

The Committee said consumer spending had been bolstered by the fiscal stimulus package but that retail sales have weakened and auto sales have "dropped sharply in both June and July."

By Patrick McGee and edited by Nancy Girgis