(From THE WALL STREET JOURNAL)
By Jon Hilsenrath
Federal Reserve officials, impatient with the economy's sluggish
growth and high unemployment, are moving closer to taking new steps to
spur activity and hiring.
Since their June policy meeting, officials have made clear -- in
interviews, speeches and testimony to Congress -- that they find the
current state of the economy unacceptable. Many officials appear
increasingly inclined to move unless they see evidence soon that
activity is picking up on its own.
Amid the recent wave of disappointing economic news, conversation
inside the Fed has turned more intensely toward the questions of how
and when to move. Central bank officials could take new steps at their
meeting next week, July 31 and Aug. 1, though they might wait until
their September meeting to accumulate more information on the pace of
growth and job gains before deciding whether to act.
Fed officials could take some actions in combination or one after
another. Fed Chairman Ben Bernanke, in testimony to Congress last
week, listed several options under consideration, including a new
program of buying mortgage-backed or Treasury securities, new
commitments to keep short-term interest rates near zero beyond 2014 or
an effort to push already-low benchmark short-term interest rates even
lower.
Determined to keep trying to get the economy going without causing
inflation, the Fed is exploring other novel measures. One idea
mentioned by Mr. Bernanke in his testimony would be to use a facility
the Fed calls its discount window to provide cheap credit directly to
banks that make new business or consumer loans. But it isn't clear
such a program would do much good when banks already have ample access
to cheap credit and this kind of program doesn't appear to be winning
favor at the moment.
Mr. Bernanke told Congress he wants to see more progress in reducing
unemployment and he expressed frustration the economy appears to be
"stuck in the mud." The Fed chairman has spoken in the past about the
importance of the economy achieving what he calls "escape velocity" --
growth that is fast enough to give the economy forward,
self-reinforcing momentum.
New worries are emerging at the Fed that the economy is falling short
of that speed. The Commerce Department is expected to report this week
that the economy grew at a rate substantially below 2% in the second
quarter after expanding just 1.9% in the first quarter. The
unemployment rate, at 8.2% in June, has moved little since January.
Retail sales have been soft in recent months and financial markets,
particularly in Europe, have become strained in past weeks. Some
officials believe the outlook for growth has worsened a bit since the
Fed's June meeting, when the central bank marked down its projections.
Several officials have expressed both frustration with the
disappointing recovery and a willingness to act if growth and
employment don't pick up. Sandra Pianalto, president of the Cleveland
Fed, said in public comments earlier this month she would be prepared
to act if weak economic data persisted. Dennis Lockhart, the Atlanta
Fed president, said more action could be needed barring a "step-up of
output and employment growth."
Fed "hawks" -- who tend to worry more about inflation and have opposed
more action to stimulate the economy -- have softened their tone and
acknowledged the frustration. "I know people feel like we haven't made
enough progress," James Bullard, St. Louis Fed president, said in an
interview this month. He said he would be prepared to act if inflation
falls too low or if a new shock hits the economy.
There are several reasons why Fed officials might wait for their
September meeting to decide whether to proceed. By then they will have
seen two more monthly unemployment reports and two more months of data
on output, spending and investment. Fed officials update their
economic projections at the September meeting and Mr. Bernanke holds
his a quarterly news conference after, which would give him an
opportunity to publicly explain the Fed's thinking.
Moreover, some officials believe the Fed's June decision to continue a
program known as "Operation Twist" through year-end could help the
economy and want to give it time to work. Under that program, the Fed
is buying $267 billion worth of long-term Treasury securities and
selling an equal amount of short-term securities in an attempt to push
down long-term interest rates to spur spending and investment.
The most controversial option on the Fed's list is a large bond-buying
program in which the Fed would acquire long-term securities with newly
created money -- a step known to many as "quantitative easing," or QE.
In the Fed's first round of QE in 2009 and early 2010, it bought $1.25
trillion worth of mortgage-backed securities and $300 billion of
Treasury securities and debt issued by Fannie Mae and Freddie Mac. In
its second round in 2010 and 2011, the Fed bought $600 billion of
Treasury securities. A third round could involve similarly substantial
sums. Many officials have signaled a preference for buying mortgage
securities. One reason: They fear that if they buy many more Treasury
securities, the Fed could become too large a presence in that market
and disrupt trading.
For years, critics have warned that such programs would spur
inflation, a collapse in the value of the dollar or a new financial
bubble. Most measures of consumer price inflation, however, are close
to the Fed's 2% goal, and broad measures of the dollar exchange rate
have strengthened in the past 12 months, which has damped the power of
these warnings.
Mr. Bernanke, meanwhile, has argued that the programs are helpful,
while acknowledging their effects can be limited under certain
conditions, such as when interest rates are already very low and
demand for credit remains weak.
A new round of bond-buying would be politically controversial so close
to the November presidential election. During Mr. Bernanke's testimony
last week, Democrats made clear they wanted the Fed to act and
Republicans said it should proceed cautiously. The Fed chief has said
the central bank will seek to do what is best for the economy,
regardless of political pressure.
Another option is a change in the Fed's public communication about its
plans. Since January the Fed has been saying it doesn't expect to
raise short-term interest rates until late 2014. The Fed could change
its policy statement in September to move that date into 2015. Such
pronouncements about the expected path of short-term rates tend to
reduce long- and medium-term interest rates. The Fed thinks this
supports near-term spending and investment.
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(END) Dow Jones Newswires
July 24, 2012 19:51 ET (23:51 GMT)
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