Federal Reserve Officials Fear Looming Economic Crisis

Federal Reserve officials say they are open to taking further action to support the struggling U.S. economy, but minutes of the their June meeting show there is no consensus as to whether the economy needs more help now.

Some members said the economy may already need additional help, but several others said further action “could be warranted” if the recovery lost momentum, if risks became more pronounced or inflation seemed likely to run below the committee’s target.

Stock prices dropped after the Fed expressed concerns about the economy. The Dow Jones industrial average had been down nearly 40 points before the minutes were released at 2 p.m. Eastern time before falling 112 points, on track for its fifth straight day of losses.

Hiring was anemic for a third straight month as the economy added only 80,000 jobs in June.

David Jones, chief economist at DMJ Advisors, said he thinks the Fed will eventually launch a new bond buying program.

Many economists predict the Fed will hold off for one more meeting and give the job market a little longer to show improvement. If the economy doesn’t improve, the Fed could announce some new action at its Sept. 12-13 meeting.

Since the recession, the Fed has bought more than $2 trillion in Treasury bonds and mortgage-backed securities, expanding its portfolio to more than $2.8 trillion.

In the meantime, the Fed plans to keep short-term interest rates at a record low until at least late 2014. Jones said officials might push that target into 2015 to reassure investors that borrowing costs will stay low even longer than expected.

At last month’s meeting, Fed officials signaled their concern that the stagnant U.S. economy could worsen if Congress failed to avert tax hikes and spending cuts that kick in at the end of the year as well as worries that Europe’s debt crisis will weigh on U.S. growth.

More stimulus “won’t become a reality unless the recovery loses even more momentum or a more severe flare up in the euro-zone crisis raises the already elevated downside risks,” said Paul Ashworth, chief U.S. economist at Capital Economics.

The Fed lowered its growth forecast, noting that the U.S. job market had weakened and consumer spending slowed. It also said it didn’t expect the unemployment rate to fall much further this year from its current 8.2 percent.

Some members noted that defense contractors are already planning layoffs in case lawmakers don’t address the package of tax hikes and spending cuts by the end of the year.

The Fed extended a program that shifts its bond portfolio to try to lower long-term interest rates. Policymakers left open the possibility of providing further help, such as launching a new program of bond purchases.

Chairman Ben Bernanke may offer further guidance on the Fed’s plans next week when he delivers the central bank’s updated economic assessment to Congress. After the June meeting, Bernanke told reporters he was open to another round of bond purchases if the job market didn’t improve.

Employers added an average of just 75,000 jobs a month in the April-June quarter — only about a third of the 225,000 jobs a month created in the first three months of the year.

After its last meeting, the Fed downgraded its economic outlook. It now expects growth of just 1.9 percent to 2.4 percent in 2012, half a percentage point lower than its April forecast.

Advertisements

Leave a comment

No comments yet.

Comments RSS TrackBack Identifier URI

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s