The Federal Reserve is heading toward launching a new round of
stimulus to buck up the weak economy, but stopped short of doing so
right away.
The decision to make what amounted to a conditional promise of action
came Wednesday at the end of the central bank's two-day policy
meeting. In an uncharacteristically strong statement, the Fed said it
will "closely monitor" the economy and "will provide additional
accommodation as needed to promote a stronger economic recovery and
sustained improvement in labor market conditions." Translation: The
Fed will move if growth and employment don't pick up soon on their
own.
As central bank messages go, this was a stark declaration and helped
soften disappointment among investors that the Fed didn't take such
action on Wednesday, as some had expected. The Dow Jones Industrial
Average finished the day down 37.62 points, at 12971.06.
With the move, the strategy of Fed Chairman Ben Bernanke is coming
into clearer focus. Like a prosecutor preparing a difficult case for a
skeptical jury, Mr. Bernanke is building a case that the economy needs
more help and that the Fed can provide it without sparking other
problems.
Attention now shifts to events in coming weeks, including the Labor
Department's report Friday on July unemployment. The Fed didn't have
those figures, which officials watch very closely, at its latest
meeting.
Then, on Aug. 31, Mr. Bernanke returns to Jackson Hole, Wyo. -- site
of the central bank's annual retreat and a backdrop for past Fed
emergency actions.
"We could have an event like we had back in August 2010 where he
telegraphed [a second round of bond buying]," said Brian Jacobsen,
chief portfolio strategist at Wells Fargo Funds Management. "That
speech is going to be much more important than this statement."
On Thursday, the European Central Bank concludes its own meeting, a
week after ECB President Mario Draghi raised expectations for action
by declaring the bank would do "whatever it takes" to save the euro.
One tool the Fed has been considering: A program to purchase
mortgage-backed securities with money the Fed essentially prints. That
could further drive down mortgage rates. Rates on 30-year mortgages
were around 3.75% in mid-July, according to Freddie Mac. Refinancing
activity has picked up in the past few weeks as rates have fallen,
according to the Mortgage Bankers Association. Mr. Bernanke has listed
other options to lawmakers, which remain possible but seem less likely
to have a big impact.
However, the economy shows few signs of picking up. Macroeconomic
Advisers LLC, a private forecasting firm, estimates it is growing at a
rate of 1.8% in the third quarter. The economy expanded in the first
half of the year at a rate of 1.7%, far slower than any Fed official
predicted in January for the full year, according to the Fed's
official forecasts.
The Fed said in its statement Wednesday that growth had "decelerated
somewhat" during the first half of the year. Meanwhile the
unemployment rate has stalled just above 8% and inflation is
retreating.
A few more weeks of such data could lead Mr. Bernanke to believe he is
ready to close his case. Some Fed officials felt action already was
justified. Moving in August might have been more politically palatable
for the Fed chairman, allowing him to take a controversial move before
the presidential election season heats up. The Fed chief has said the
central bank will seek to do what is best for the economy, regardless
of political pressure.
Lawmakers put out dueling statements Wednesday, highlighting the
partisan divide that awaits the central bank. GOP lawmaker Rep. Kevin
Brady of Texas praised the Fed for its restraint, saying it "would
have been a mistake for the FOMC to intervene further into the
economy." Sen. Charles Schumer of New York, a top Senate Democrat, was
reassured by the central bank's language that it plans to act soon.
"The Fed should not be deterred from doing what's needed to reduce
unemployment," he said.
Mr. Bernanke has taken a deliberate approach to launching programs
since the worst of the financial crisis passed in 2009. A $600 billion
Treasury bond-buying program known as Quantitative Easing 2, or QE2,
was signaled by Mr. Bernanke in August 2010 but not formally launched
until November. That program was preceded by a strong official policy
statement from a meeting a couple of months earlier.
On Sept. 12 and 13, the Fed convenes again, for a meeting that carries
heightened expectations given Wednesday's statement. At the meeting,
officials will update their economic forecasts and then Mr. Bernanke
will hold a news conference.
Donald Kohn, a Brookings Institution scholar and the former Fed vice
chairman, said the phrase "closely monitor" in Wednesday's statement
has been used by the Fed in the past to signal "a readiness to action
that was more than the usual readiness to action." In 2001, when Alan
Greenspan was chairman, Fed officials discussed whether the phrase
should be used as a sign that the central bank could act even between
meetings, transcripts of Fed meetings show, though it hasn't been used
that way more recently.
The Fed, however, remains burdened by doubts in and outside its ranks
about whether five years of monetary easing has done much to lift an
economy still repairing the damage from last decade's housing bubble.
Critics say there is little more the Fed can do to help, having
already pushed short-term interest rates to near zero. They contend
its unconventional actions could do more damage by sparking inflation,
and that in the meantime the Fed is punishing savers who are getting
little return on their bond investments.
"We don't see any really viable options that the Federal Reserve has
here," Lacy Hunt, chief economist at Hoisington Investment Management
of Austin, Texas, said before the Fed meeting.
Mr. Bernanke has argued the Fed can do more to stimulate financial and
economic activity. Academic studies suggest bond buying helps push
down long-term interest rates, such as those for mortgages. Moreover,
Fed officials have become increasingly comfortable their actions
aren't causing inflation. Most government measures of consumer price
inflation are at or below the Fed's 2% target.
---
Matt Phillips and Jonathan Cheng contributed to this article.
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(END) Dow Jones Newswires
August 01, 2012 14:45 ET (18:45 GMT)
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