Written by Denny Gulino

WASHINGTON (MNI) - The Federal Open Market Committee, in its Nov. 3-4 meeting, saw uncertainty "quite elevated" and unemployment likely to remain high amid many quarters ahead of slow growth, while for now, the Fed continues to test exit mechanisms, minutes of the meeting showed Tuesday.

In fact, looking ahead in its quarterly update of economic projections, the FOMC still saw an unemployment rate as high as 9.8% by the end of next year, not even half a point better than the current level.

How slow is the recovery likely to be? "Most participants anticipated that about five or six years would be needed for the economy to converge fully to a longer-run path characterized by a sustainable rate of output growth and by rates of unemployment and inflation consistent with their interpretation of the Federal Reserve's objectives," the economic projections which accompanied the minutes said. Some thought it would take even longer.

Disagreement over exit mechanisms was evident in the "range of views" reflected in the minutes.

"Several participants thought that asset sales could be a useful tool to reduce the size of the Federal Reserve's balance sheet and lower the level of reserve balances," the minutes said, "either prior to or concurrently with increasing the policy rate."

However, "Other participants had reservations about asset sales -- especially in advance of a decision to raise policy interest rates, and noted that such sales might elicit sharp increases in longer-term interest rates that could undermine attainment of the Committee's goals."

Furthermore, the minutes said, those with reservations about asset sales "believed that other reserve management tools such as reverse RPs and term deposits would likely be sufficient" with assets being allowed to "run off over time."

The description of the disagreement on exit mechanisms was accompanied by agreement on the need to be ready to exit "when appropriate" and the minutes said testing of various mechanisms would continue.

The minutes confirmed what Philadelphia Federal Reserve Bank President Charles Plosser told MNI's Steve Beckner in an interview a few days after the most recent FOMC meeting, that there is as yet no convergence of views on exit mechanisms.

"I think it's important we have a Plan B, and I think it's important that we understand that we have two options here: one is to increase interest on reserves, and the other would be to sell assets," Plosser had said. "And so it may end up being a combination of things, and I think that would be OK," Plosser said.

The minutes said the Fed staff had made "considerable further progress" on refining its tools "that could help support a smooth withdrawal of policy accommodation at the appropriate time."

The dollar came in for a glancing mention that signified a continuing concern but no different than has been described already by Fed officials.

"Participants noted that the recent fall in the foreign exchange value of the dollar had been orderly and appeared to reflect an unwinding of safe-haven demand in light of the recovery in financial market conditions this year," the minutes said.

"Any tendency for dollar depreciation to intensify or to put significant upward pressure on inflation would bear close watching," the FOMC members agreed.

In its updated "central tendency" economic projections, the FOMC slightly narrowed its outlook for this year's average fourth quarter unemployment rate, to a range of 9.9% to 10.1%. By the fourth quarter of next year sees it improving only to 9.3% on the low end and to 9.7% on the high end of its range.

For GDP, the FOMC now sees this year's fourth quarter to fourth quarter range much improved, slippage of just 0.4% to 0.1%. At its June 23-24 meeting, the FOMC had seen '09 real GDP down 1.5% to 1.0%.

For next year the FOMC upgraded its GDP outlook to a range of 2.5% to 3.5%, instead of up 2.1% to 3.3%.

Personal consumption expenditures inflation this year is now up in a slightly narrower range, 1.1% to 1.2% instead of up 1.0% to 1.4%. Core PCE inflation is seen up 1.4% to 1.5%, instead of a slightly lower range of 1.3% up to a higher high of 1.6%.

While the FOMC statement at the conclusion of its most recent meeting said "economic activity has continued to pick up" and the minutes echoed that the members saw activity "picking up" but nevertheless still "rather slow."

But the minutes added that, "Most participants now viewed the risks to their growth forecasts as being roughly balanced rather than tilted to the downside, but uncertainty surrounding these forecasts was still viewed as quite elevated."

"Downside risks to growth included the continued weakness in the labor market and its implications for income growth and consumer confidence," the minutes said, "as well as the potential for credit availability to remain relatively tight for consumers and some businesses."

The FOMC noted that the upturn in GDP "appeared to reflect stronger final demand and not just a slower pace of inventory decumulation." It was still "not clear" to the members how much of the GDP growth, originally reported at a 3.5% annual rate, revised earlier in the day to 2.8%, was because of government help. The revision also showed inventory decumulation was slightly steeper than originally reported.

The minutes did not reflect any discussion of raising rates and no new concern about accelerating inflation.

"In the near term," the minutes said, "most participants anticipated that substantial slack in both labor and product markets would likely keep inflation subdued."

Some members did indeed talk about the "recent rise" in the price of oil and other commodities "as well as import prices stemming from the decline in the foreign exchange value of the dollar," worried they "could boost inflation pressures."

But some members "felt that risks as tilted to the downside in the near term, reflecting the quite elevated level of economic slack and the possibility that inflation expectations could begin to decline in response to the low level of actual inflation."

** Market News International Washington Bureau: 202-371-2121 **