The minutes from the August 8 meeting of the US Federal Open Market Committee, the first meeting in two years at which the Fed decided against hiking interest rates, were released overnight showing that concern about damage to the economy led Bernanke and co. to pause: “The full effect of previous increases in interest rates on activity and prices probably had not yet been felt, and a pause was viewed as appropriate to limit the risks of tightening too much.”

To a large extent, the minutes offered little to surprise. The Fed highlighted that it is still concerned about the risk of inflation, but it is also wary of crippling economic activity, and therefore is prepared to sit tight and wait for data to dictate future movements.

However, the Fed appeared optimistic that inflation would fall: “Most members anticipated that inflation pressures quite possibly would ease gradually over coming quarters and the current stance of policy could well prove to be consistent with satisfactory economic performance”

The markets reacted predictably with 10-year bond yields rallying to a five-month low of 4.78%, while the US dollar fell. News that energy companies are sending workers back into the Gulf of Mexico helped the price of oil decline to a two-month low, and gold also fell.

While the Fed seems broadly pleased with the position of the US economy, consumers are not so optimistic. The Conference Board Consumer Confidence Index showed a substantial decline during August, now standing at 99.6, down from 107.0 in July. The index now stands at its lowest point in 2006, after the largest single month fall since Hurricane Katrina. The weekly ABS News/Washington Post Consumer Index also reported a significant fall this week, dropping five points to -19 on its scale of 100 to -100. Poor business conditions and four months of weak employment data are obviously having an impact on consumers.

However, the economic outlook is far from dire: economists are expecting an increase in the July reading on personal spending, and Friday’s August employment data is likely to be slightly stronger than July. The price of petrol has also declined significantly in the past month, dropping 5% to an average of $2.84 a gallon from a peak of $3.01 in July.

Read more at Henry Thornton.