By Jon Hilsenrath and Kristina Peterson
WASHINGTON--Federal Reserve officials sent new signals they are
seriously considering more actions to bolster the economic recovery
but disappointed many investors by not indicating they were ready to
move.
A few Fed officials were ready to move aggressively when the Fed met
in June and several others said they might want to take new measures
if the recovery loses momentum or their growth and employment
forecasts are cut once again. That is according to minutes of the
central bank's June 19-20 meeting, which were released Wednesday with
their usual three-week lag.
The minutes portray an institution in a state of high alert over the
economic outlook. Fed officials expressed worry at the meeting about
risks to the American economy stemming from the euro-zone debt crisis,
the possibility of a "significant slowdown" in China's economy and the
prospect of deep U.S. government-spending cuts and tax increases
scheduled to go into effect at year-end.
Since the meeting, a host of economic indicators have continued to
disappoint, including a Labor Department report last week that U.S.
employers added just 80,000 jobs in June, leaving the unemployment
rate stuck at 8.2%. Other reports showed recent softening in
manufacturing, retail spending and consumer confidence in the U.S. and
a more pronounced slowing of global economic growth. Many forecasters
now project the U.S. economy expanded at a pace below 2% in the second
quarter, after notching just 1.9% in the first quarter.
Dan Greenhaus, chief global strategist of BTIG LLC, described the Fed
report as "a clear and unquestioned step" in the direction of taking
further action to boost growth.
But the Fed is once again finding itself in a difficult spot.
Officials aren't yet sure if the recent slowdown in growth is
transitory or permanent. Moreover, many Fed officials are
uncomfortable with the mix of unconventional tools that they have to
address the soft economy. In normal times, they cut short-term
interest rates to spur spending and investment. But short-term rates
are already near zero and their other tools--such as purchases of
long-term securities--are unproven and carry risks.
Those concerns still might not impede them from trying again to
bolster the recovery. In the weeks since the meeting, some Fed
officials have expressed new worries about the economy.
"We're really right at that edge. If economic data continue to come in
below expectations and if our view is that we don't expect to make
progress on our mandate, then I would think we need more
accommodation," Federal Reserve Bank of San Francisco President John
Williams said in remarks in Idaho Monday. The Fed's mandate is to
facilitate stable inflation, which it interprets to be 2%, and maximum
employment. Mr. Williams said purchases of mortgage-backed securities
could be the most effective approach.
In the June minutes, the Fed didn't signal that it is prepared to move
soon, which initially disappointed many investors. Stock prices fell
sharply after the minutes were released, but recovered much of that
ground later in the day. The Dow Jones Industrial Average finished the
day at 12604.53, down 48.59 points.
At the June meeting, the Fed decided to continue through year-end a
program known as "Operation Twist," which is meant to push down
long-term interest rates to support spending and investment by
purchasing long-term Treasury securities and selling short-term
securities.
The Fed appeared to lay out clearer markers for what could spur
further action: "Additional policy action could be warranted if the
economic recovery were to lose momentum, if the downside risks to the
forecast became sufficiently pronounced, or if inflation seemed likely
to run persistently below the Committee's longer-run objective,"
several officials concluded at the meeting, according to the minutes.
The Fed projects the economy will grow by 1.9% to 2.4% this year and
2.2% to 2.8% next year, enough to slowly bring the unemployment rate
down to below 8% next year. But even those forecasts might be too
sunny. "The Fed is still too optimistic on the outlook," Paul
Edelstein, an economist with IHS Global Insight, a research firm, said
in a note to clients Wednesday. He expects the Fed to lower its
forecast in the months ahead. "This will be the trigger for the Fed to
initiate another round of bond purchases," he said in a note to
clients.
The Fed could take several steps if it wants to try to spur growth.
High on the list of options is a new round of "quantitative easing,"
in which the central bank would purchase large sums of long-term
securities in an effort to lower long-term interest rates.
The Fed also could postpone from 2014 to 2015 or beyond its projected
date for raising short-term interest rates. The Fed's target interest
rate, known as the federal funds rate, has been near zero since late
2008.
Fed officials believe the central bank's actions are helping to push
down long-term interest rates and giving households and businesses
more incentive to spend, invest and hire. The Fed also believes the
bond-buying programs push investors into other kinds of investments,
such as stocks, which also help to drive spending and investment.
However critics and even Fed officials note that the effects of these
efforts have been muted, in part because banks are reluctant to make
loans at the low interest rates the Fed has engineered. Some officials
believe the Fed has done all that it can to promote growth with low
interest rates and that it is now up to others-such as lawmakers and
the White House-to lay out fiscal and other economic policies that
would be more supportive of the economy in the long run.
Fed Chairman Ben Bernanke developed a reputation for unconventional
action during the depths of the financial crisis in 2008 and 2009. The
most recent minutes suggest the Fed once again is looking beyond
conventional action for ways to support a recovery that has fallen
short of its own expectations for growth and job gains.
"Several participants commented that it would be desirable to explore
the possibility of developing new tools to promote more accommodative
financial conditions and thereby support a stronger economic
recovery," the meeting minutes showed.
One possibility for the Fed would be buying mortgage-backed
securities. The Fed bought $1.25 trillion worth of mortgage debt in
2009 and early 2010. Since then, it has focused much of its
bond-buying actions in the market for U.S. Treasury securities. But
the minutes suggested officials are starting to wonder whether they
have already pushed the Treasury securities market to its limits.
"Some members noted the risk that continued purchases of longer-term
Treasury securities could, at some point, lead to deterioration in the
functioning of the Treasury securities market that could undermine the
intended effects of the policy," the minutes showed. Yields on 10-year
Treasury notes are already near historic lows at less than 1.5%.
Some academic research has shown the Fed's purchases of mortgage
securities are more effective than its Treasury purchases at driving
down interest rates that touch consumers and businesses, such as
mortgage rates or corporate borrowing rates.
Write to Jon Hilsenrath at jon.hilsenrath@wsj.com and Kristina
Peterson at kristina.peterson@dowjones.com
(END) Dow Jones Newswires
July 11, 2012 18:27 ET (22:27 GMT)
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