The economy seems to be improving, but the Fed is still taking things slowly.

In the Federal Reserve’s minutes from its July monetary policy meeting, released Wednesday afternoon, members of the Federal Open Market Committee expressed cautious optimism about the U.S. economy.

According to the minutes, members said it seemed that the U.S. economy was moving closer to the committee’s objectives — “maximum employment and 2 percent inflation” — and agreed to slice $10 billion off the Fed’s monthly asset-buying program, but members also remained committed to the long-held low federal funds rate of 0.25 percent.

“Almost all participants agreed that it would be appropriate to retain the federal funds rate as the key policy rate,” the minutes stated, “and they supported continuing to target a range of 25 basis points for this rate at the time of liftoff and for some time thereafter.”

In other words, “liftoff” — the eventual hiking of interest rates — will be a cautious affair.

Federal Reserve July Minutes

Federal Reserve Chair Janet Yellen testifies on Capitol Hill, July 16, 2014. (AP Photo/Pablo Martinez Monsivais, File)

Members also wrestled with how to characterize the American labor market, as the unemployment rate and other indicators improved but evidence remained that the American labor force is not being fully utilized.

The minutes stated: “[T]hey worried that the degree of labor market slack was difficult to characterize succinctly… At the conclusion of the discussion, the Committee agreed to state that labor market conditions had improved, with the unemployment rate declining further, while also stating that a range of labor market indicators suggested that there remained significant underutilization of labor resources.”

When will the Fed offload its mortgage-backed securities (MBS) and other assets?

Members were not in agreement on whether the Fed’s balance sheet should be reduced before a hike in the federal funds rate, or after.

From the minutes:

Participants also discussed approaches to normalizing the size and composition of the Federal Reserve’s balance sheet. In general, they agreed that the size of the balance sheet should be reduced gradually and predictably. In addition, they believed that, in the long run, the balance sheet should be reduced to the smallest level consistent with efficient implementation of monetary policy and should consist primarily of Treasury securities in order to minimize the effect of the SOMA portfolio on the allocation of credit across sectors of the economy. A few participants noted that the appropriate size of the balance sheet would depend on the Committee’s future decisions regarding its framework for monetary policy. Most participants supported reducing or ending re- investment sometime after the first increase in the target range for the federal funds rate. A few, however, believed that ceasing reinvestment before liftoff was a better approach because it would lead to an earlier reduction in the size of the portfolio. Most participants continued to anticipate that the Committee would not sell MBS, except perhaps to eliminate residual holdings. However, a couple of participants preferred to sell MBS in order to unwind the effect of the Federal Reserve’s holdings on mortgage rates relative to other interest rates more rapidly than would occur as a result of repayments of principal alone. Some others noted that, given the uncertainties attending the normalization process and the outlook for the economy and financial markets, it could be helpful to retain the option to sell some assets.

Chart via Google Finance

Chart via Google Finance

As Business Insider’s Sam Ro noted, the stock market tanked as the minutes were released at 2 p.m. EDT, though prices have since rallied.

“The concern for market participants is that the Fed will tighen monetary policy in the form of rate hikes sooner than later,” wrote Ro. “The idea is that if the Fed tightens, then it pulls liquidity out of the credit markets, which indirectly would pull liquidity out of the stock markets.”

Read the full minutes here.

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