Federal Reserve officials predicted the expansion will be too slow to return to full employment in the next two years while also saying further measures to boost the economy probably won't be needed in the short term.
Federal Reserve officials predicted the expansion will be too slow to return to full employment in the next two years while also saying further measures to boost the economy probably won’t be needed in the short term.
Policy makers said the outlook had “softened somewhat” and that risks to the recovery had risen, according to the minutes of their June 22-23 meeting released yesterday in Washington. The Federal Open Market Committee “would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably.”
“Fed officials would have to see the economy in a free fall” before resuming bond purchases to ease financial conditions, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “The economy is not in a free fall. They also see the benefits of additional asset purchases as not that great.”
Fed Chairman Ben S. Bernanke next week will deliver his semiannual report on the economy to members of Congress who will be facing re-election in November. His challenge will be to explain why policy makers shouldn’t do more to reduce an unemployment rate they predicted yesterday would still exceed 7 percent in 2012, more than the 5 percent to 5.3 percent they consider full employment.
“The Fed officials who have been talking about doing more stimulative measures have made it clear the bar is very high,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut.
Ten-year Treasury yields fell for the first time in six days yesterday as the minutes showed some Fed officials saw “some risk of deflation.” The yield on the benchmark 10-year note tumbled 8 basis points to 3.05 percent.
The Fed minutes, together with a government report showing retail sales fell for a second month in June, ended a six day rally in U.S. stocks. The Standard & Poor’s 500 Index slipped less than 0.1 percent to 1,095.17 after falling as much as 0.7 percent. Shares of retailers including Target Corp. and Amazon.com Inc. declined.
Reports today showed that wholesale prices fell more than forecast in June and manufacturing in the New York region expanded in July at the slowest pace this year.
Prices paid to factories, farmers and other producers fell 0.5 percent, Labor Department figures showed. Excluding food and fuel, so-called core prices climbed 0.1 percent. The Federal Reserve Bank of New York’s general economic index dropped to 5.1 from 19.6.
Central bankers yesterday lowered their forecast for growth this year to a range of 3 percent to 3.5 percent, versus 3.2 percent to 3.7 percent in April. The new outlook is still above their estimate of long-run potential of 2.5 to 2.8 percent.
Growth will stay above potential for the next two years, policy makers said. The economy will expand 3.5 percent to 4.2 percent next year and 3.5 percent to 4.5 percent in 2012. The so-called central tendency forecasts exclude the three highest and three lowest projections among the 17 FOMC participants.
So long as the economy grows faster than its potential, spare capacity will be used up and the unemployment rate should fall. Because the economy lost 8.4 million jobs, the most of any postwar recession, employment won’t bounce back quickly.
“The unemployment rate was generally expected to remain noticeably above its long-run sustainable level for several years, and participants expressed concern about the extended duration of unemployment spells for a large number of workers,” the minutes said.
Fed forecasters expect a jobless rate of 8.3 percent to 8.7 percent in the final three months of 2011. The range for 2012 is 7.1 percent to 7.5 percent.
The risk is that unemployment keeps a lid on consumer confidence, restraining the spending that makes up 70 percent of the economy. That in turn could make companies hesitate to hire, economists said.
“I can’t stress enough the difficulty in the hand they’re trying to play,” said Paul Ballew, a former Fed economist who’s now a senior vice president at Nationwide Mutual Insurance Co. in Columbus, Ohio. “Clearly, they’re not going to do anything to tighten too soon, but on the other hand they’re keeping their options open.”
Reports have shown further economic weakness since the June FOMC meeting, when policy makers repeated their pledge to keep their benchmark rate low for an “extended period.”
Data from the Commerce Department yesterday showed retail sales fell 0.5 percent last month after declining 1.1 percent in May. The Institute for Supply Management’s index of non- manufacturing businesses, which covers about 90 percent of the economy, fell to a four-month low last month. Private employers added 83,000 jobs in June, less than the 110,000 forecast by economists.
Economists in the first week of July pushed back their estimates for when the Fed would raise interest rates to the second quarter of next year from the first quarter, a Bloomberg News survey showed.
Should “pessimistic” economic data including unemployment be “portents of what’s coming, then the Fed needs to be prepared to go back into quantitative easing in a big way,” former Fed Vice Chairman Alan Blinder said in a Bloomberg Television interview July 13, referring to asset purchases.
“If Bernanke isn’t a little more aggressive when he testifies before Congress later this month, I would be disappointed,” said Julia Coronado, senior U.S. economist at BNP Paribas in New York. “We have pretty slow growth in output. He could strengthen the emphasis on downside risks.”
U.S. central bankers purchased more than $1 trillion of mortgage-backed securities in an effort to provide further stimulus to the economy after the benchmark federal funds rate was cut to a range of zero to 0.25 percent in December 2008.
While those purchases may have helped lower mortgage rates, they didn’t prompt a boom in credit. Consumer borrowing fell $9.1 billion in May following a $14.9 billion decrease in April.
JPMorgan Chase’s Feroli said additional bond purchases would lower long-term yields. With U.S. 10-year notes yielding 3 percent, Fed officials may see little to gain from lowering them further.
“I still don’t think we are even close to getting more quantitative easing,” Feroli said.
