Fed issues bleak outlook
The Federal Reserve is poised for a fresh assault on the U.S.’s high unemployment rate.
Policy makers slashed their economic outlook at a two-day meeting that ended Wednesday, and officials who were previously opposed to further stimulus went quiet, suggesting Fed chief Ben Bernanke has a clear path to try to boost economic growth.
“We need to do whatever we can to move toward maximum employment as long as the tools are efficacious,” Mr. Bernanke said at a press conference. “We are prepared to do more and we have the tools to do more if that’s appropriate.”
The Fed now predicts the U.S. economy will expand 1.7 per cent this year, barely half the pace that economists say is needed to materially reduce a jobless rate that is stuck above 9 per cent.
The new projection is a big downgrade from a June estimate of about 3 per cent, a miss that Mr. Bernanke attributed in part to an underestimation of how aggressively households and businesses would pay off debts rather than revert back to their traditional spending and investing habits.
It’s a forecast with so little economic momentum that inflation barely registers as a worry, even though policy makers have held their benchmark interest rate near zero for almost three years and have pumped hundreds of billions of dollars into the economy. The Fed predicts growth of no more than 2.9 per cent in 2012, compared with a June estimate of about 3.5 per cent, a relatively weak reading that justifies further stimulus barring a surprise surge in economic activity.
The Fed is “biased toward easing policy further if necessary,” Kevin Logan, chief U.S. economist at HSBC in New York, said in analysis of the Fed’s latest policy meeting, which concluded Wednesday in Washington. “There was no hint that the committee expected growth to accelerate from this point forward.”
The deterioration of the outlook appeared to silence the bloc on the Fed’s policy committee that opposed new stimulus measures at previous meetings.
Richard Fisher, Narayana Kocherlakota and Charles Plosser, the leaders of regional Fed banks in Dallas, Minneapolis and Philadelphia respectively, voted with the majority Wednesday in approving a continuation of those stimulus programs, including the selling of $400-billion (U.S.) of short-term securities to purchase debt that matures in six to 30 years.
The contrarian impulse inside the Fed’s policy-making committee is now to do more. Chicago Fed president Charles Evans voted against the consensus achieved by his nine counterparts to stand pat, arguing that “additional policy accommodation” is needed immediately, according to the Fed’s statement on its latest meeting.
Along with its gloomier economic outlook, the Fed said the unemploymentrate likely will average about 8.5 per cent next year, well off the pace needed to meet the central bank’s mandate to achieve maximum employment, which policy makers unofficially equate to an unemployment rate of roughly 5.5 per cent.
Mr. Bernanke reiterated twice during is 45-minute session with reporters that his efforts to aid the economy would benefit greatly by “assistance from other parts of the government,” a reference to the standoff between the White House and Congress over fresh stimulus spending. The tilt of lawmakers toward austerity is one of the bigger drags on economic growth, as governments shed jobs and temporary tax cuts revert to higher rates.
Still, any expansion of monetary policy by the Fed likely will be done tentatively. Few analysts said they thought the central bank is ready for another go at quantitative easing, the controversial policy that the central bank has tried twice before, creating money to purchase financial assets such as Treasury bonds.
Instead, the Fed appears set to strengthen investor confidence by being clearer about its intentions. Mr. Evans, for example, agues that the Fed should set implicit targets for when it would raise interest rates, say once the unemployment rate dropped to 7 per cent or when inflation exceeds 3 per cent. The idea is to give executives and consumers confidence that they can invest without the risk of a sudden change in borrowing costs.
Mr. Bernanke avoided endorsing any specific proposal, but indicated that he would like to make the Fed a more transparent institution.
“No decision has been made,” he said. “But clearly there is a range of things we can do to provide more information.”
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