--Modest change in FOMC statement shows Fed is nearing fresh stimulus
--September FOMC will be key gathering for stimulus debate
--Late-August meeting in Jackson Hole could signal monetary-policy future
By Michael S. Derby
NEW YORK--Slowly but surely, the Federal Reserve is moving toward
providing more stimulus to an economy that has veered dangerously
close to stall speed.
Based on the outcome of the two-day Federal Open Market Committee
meeting concluded Wednesday, central bankers still need more time to
see whether they need to do more to aid growth. But even so, officials
hinted which direction they are likely to go in their FOMC policy
statement.
That makes the meeting scheduled for mid-September critical for the
Fed. It's the sweet spot for a change in policy largely because
Chairman Ben Bernanke will have a post-meeting press conference to
explain in greater detail whatever action is taken, if any.
The statement released by the FOMC Wednesday offered one notable
alteration to the language used in late June. Whereas in June the FOMC
said it was "prepared to take further action" if needed, now the FOMC
said "it will provide additional accommodation as needed."
The new wording had the benefit of clarifying the "bias" of future Fed
action. Credit Suisse economists said it was "a much-stronger
statement" of intent. Of course, the dominant view has been that, if
the Fed acted again, it would be to try to lift economic growth. The
FOMC statement Wednesday reduced any of the ambiguity that surrounded
monetary policy in June.
Fed officials worked "to lay the groundwork for more action in
September," said Eric Green, economist with TD Securities. The
statement is "a good deliberate policy message, and thankfully not a
knee-jerk push to more easing."
On the way to next month's FOMC gathering, the Fed will face down two
jobs reports that will help clarify the need for action. Speeches by
officials will serve their normal role of offering perspectives on the
outlook.
Looming over all of it is the Kansas City Fed's annual gathering in
Jackson Hole, Wyo., at the end of the month. Attended by a wide array
of U.S. central bankers, as well as policymakers and other luminaries
from around the world, the event offers a prime chance to signal a
shift in direction.
"The heightened alert language is meant to send the signal that the
FOMC is prepared to do something significant in September unless
things get better," said Stephen Stanley, economist with Pierpont
Securities. "So, for a third straight year, Chairman Bernanke will
have the opportunity to tee up a major easing at Jackson Hole," he
said. However, Mr. Stanley added he remains opposed to the Fed taking
any steps to again extend its balance sheet.
For most observers, the most-likely path to provide economic aid would
be for the Fed to implement what has been called QE3, for the third
round of quantitative easing: Buying a combination of Treasury and
mortgage debt to grow the central bank's balance sheet beyond its
current $2.9 trillion level. Officials hope such a policy would help
push down long-term yields and stimulate growth, although there is a
big debate about the effectiveness of further asset purchases. A
lesser-order action would be for the Fed to pledge to keep rates low
even beyond the late 2014 now currently targeted.
Goldman Sachs sees a more-graduated path for action. The bank's
analysts told clients "under our own forecast of only a slight
improvement in output and employment growth, we believe a small easing
step--most plausibly a lengthening of the forward rate guidance--is
the most likely outcome for September 13, with asset purchases
financed by renewed balance sheet expansion following in late
2012/early 2013."
Michael S. Derby, a special writer with Dow Jones Newswires, has
covered the Federal Reserve since 2001. He also writes about bond
markets and the economy, and can be reached at 212 416 2214 or via
email: michael.derby@dowjones.com.
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(END) Dow Jones Newswires
August 01, 2012 15:45 ET (19:45 GMT)
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