Fed officials warn of looming crisis for economy

WASHINGTON—The Federal Reserve is open toward taking further action to support the struggling US economy. But minutes of the Fed’s June meeting show policymakers are at odds over whether the economy needs more help now. A few said the economy may already require additional support. But several others noted that 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.

Investors appeared to be disappointed by the division within the Fed. Stock prices sank 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 pm Eastern time. At around 2.30 pm, the Dow was down 112 points, on track for its fifth straight day of losses.

Fed officials signalled at the June 19-20 meeting their concern that the struggling US economy could worsen if Congress fails to avert tax hikes and across-the-board spending cuts that kick in at the end of the year. And they expressed worries that Europe’s debt crisis will weigh on US 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 US economist at Capital Economics. Members said the economy will likely continue to grow moderately. But the Fed lowered its growth forecast at the June meeting, noting that the US 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 per cent.

Since the Fed met last month, the job market’s weakness has persisted. The government said Friday that hiring in June was weak for a third straight month. The economy added just 80,000 jobs last month. Some members noted that defence contractors are already laying plans for layoffs if lawmakers don’t address the package of tax hikes and spending cuts by the end of the year. Members warned that tighter government spending could slow the economy well into next year.

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

Since the recession, the Fed has bought more than US$2 trillion in Treasury bonds and mortgage-backed securities, expanding its portfolio to more than US$2.8 trillion. After its last meeting, the Fed downgraded its economic outlook. It now expects growth of just 1.9 per cent to 2.4 per cent in 2012, half a percentage point lower than its April forecast.

AP