INSTANT VIEW: Fed minutes show outlook improved in August

NEW YORK (Reuters) - With risks "considerably reduced" that the stabilizing U.S. economy could suffer a relapse, the Federal Reserve decided to continue its emergency long-term security buying programs as promised, documents released on Wednesday showed.

KEY POINTS: * Policy-makers envisioned only a gradual upturn in economic activity accompanied by subdued inflation after a deep recession and devastating financial meltdown, minutes of their August 11-12 meeting said. In light of that, they said it was "most likely" that they would hold benchmark rates at very low levels for an extended period of time. * The committee, in its statement, said: "Meeting participants agreed that the incoming data and anecdotal evidence had strengthened their confidence that the downturn in economic activity was ending and that growth was likely to resume in the second half of the year." * With a sluggish recovery likely, the Fed decided that neither expansion nor contraction of asset purchase was warranted. * Policy-makers discussed adding adjustable rate mortgages to those eligible for purchase under the program, the minutes showed. Some held the view that tapering off purchases of mortgage-related debt could be helpful as those programs neared completion. No decision was made in either case.

COMMENTS:

CARL LANTZ, U.S. INTEREST RATE STRATEGIST, CREDIT SUISSE, NEW

YORK:

"There doesn't seem to be anything earth-shattering. They are talking about potentially tapering off the mortgage purchases, which everybody expects.

"On the economic situation it is more of the same. Things are leveling off but lots of headwinds. They don't expect inflation to be a problem although there seem to be a few that are worried.

"Very little reaction here either from equities or bonds.

"They are on hold for a long time. Mortgage purchases are going to be tapered off as they did with the Treasury program."

STEVE GOLDMAN, MARKET STRATEGIST, WEEDEN & CO., GREENWICH,

CONNECTICUT:

"It looks like the worst is over: subdued growth, constraints on growth. But I don't think there's any surprise in the report. A lot of this has been thought out by the market already. All of these things are not really a surprise to market participants."

DAVID WYSS, CHIEF ECONOMIST, STANDARD & POOR'S RATINGS

SERVICES, NEW YORK:

"What people are looking for is how they are going to get out of this? I think It's not as hard as people think it is. A lot of it will happen naturally.

"The economic data look more upbeat. It doesn't mean we will get out of this any time soon. At least there are signs we are bottoming out. That's the first step.

"Financial conditions have also improved with the some recovery in credit default swaps and in particular financial stocks."

JOSEPH BATTIPAGLIA, MARKET STRATEGIST, STIFEL NICOLAUS,

YARDLEY, PENNSYLVANIA:

"The market had been expecting this kind of report from the Fed, that they wouldn't be moving on rates soon. The minutes are fully discounted in the market.

"The Fed is seeing seeing positive things happen to the economy, but its very uneven, so they have essentially defaulted to a position of leaving rates at zero, where they won't get economic growth at a rapid place but also won't get inflation. They're facing a quandary of how to get out of the intervention they put into place in order to avoid going deeper into the recession.

"Absolutely this is what I was expected. They're in a box. They created the conditions that put us from going deeper into a hole, and the aftermath is an economy that is very fragile and cannot handle an increase in rates any time soon. They're

in a precarious position where the economy is still too weak to do anything but sit with a neutral policy."

SCOTT BROWN, CHIEF ECONOMIST, RAYMOND JAMES & ASSOCIATES, ST.

PETERSBURG, FLORIDA:

"We didn't expect to see anything new about the economic outlook. The real interest was in the quantitative easing portion. We know they decided to curtail the purchases of Treasuries, but there is some discussion of purchasing adjustable rate mortgages."

MARKET REACTION: STOCKS: U.S. stock indexes were little changed. BONDS: U.S. Treasury debt prices shed gains, but later rebounded. DOLLAR: U.S. dollar rallied against the yen and euro.