WASHINGTON – Federal Reserve Chairman Ben Bernanke will be ready for the question. And lawmakers will be eager for an answer:
What’s going on with the economy?
It’s a question that’s raising fears and dividing economists inside and outside the Fed. How much guidance Bernanke will provide when he visits Capitol Hill on Thursday is unclear.
In its most recent economic forecasts in late April, the Fed upgraded its outlook for 2012. It predicted more growth and lower unemployment than it had three months earlier. Since then, job growth has slumped. Stock prices have dropped. Europe’s debt crisis has deepened.
Now, members of the Joint Economic Committee will want to know whether Bernanke and the Fed have turned gloomier — and, if so, whether they’re likely to act further to aid the economy.
The Fed has made two rounds of bond purchases to try to lower long-term interest rates and encourage borrowing and spending. After those purchases ended, the Fed began a program dubbed Operation Twist: It sells shorter-term securities and buys longer-term bonds to keep their rates down. Operation Twist is set to end at the end of this month.
Bernanke has said that more bond purchases, or other steps by the Fed, are still an option if the economy weakens. But many analysts don’t expect further moves at the Fed’s next policy meeting June 19-20. They note that long-term rates have already touched record lows. And few think further Fed action would lower them much more.
Many economists think Bernanke will discuss the possibility of further Fed efforts at a news conference after the June meeting but won’t announce anything. Some say he would help shore up confidence by reiterating that more action remains an option should the economy weaken.
“Just the fact that Bernanke is talking about more Fed bond buying would be important,” said Sung Won Sohn, an economics professor at California State University. “What we need is a psychological lift.”
A bleaker view of the economy has taken hold in recent weeks, especially as hiring has weakened. U.S. employers added just 69,000 jobs in May, the fewest in a year. Since averaging a robust 252,000 a month from December through February, job growth has slowed to a lacklustre 96,000 a month.
And the U.S. economy grew at a tepid annual rate of 1.9 per cent in the first three months of 2012.
Fears are also growing that a collapse of Europe’s euro currency union could trigger a panic and perhaps cause a global recession.
On Thursday, lawmakers will likely want to know how concerned Bernanke and other Fed officials are.
Do they think the U.S. hiring slump is partly a temporary setback because a warm winter caused some hiring to occur earlier in the year than usual?
Does the Fed still think the U.S. economy will grow between 2.4 per cent and 2.9 per cent this year? And that unemployment, now at 8.2 per cent, will be between 7.8 per cent and 8 per cent at year’s end?
Is further Fed action likelier than it was at the Fed’s previous meeting in April?
How grave a threat is Europe’s crisis?
The Fed’s policy committee has been split between those who favour doing everything possible to strengthen the economy and reduce unemployment and those more concerned about inflation risks.
Richard Fisher, president of the Dallas Federal Reserve Bank, said in a speech Tuesday that he would oppose further Fed efforts to bolster the economy.
“Were we to go down the path to further accommodation at this juncture, we would not simply be pushing on a string but would be viewed as an accomplice to the mischief that has become synonymous with Washington,” Fisher said.
Fisher isn’t a voting member of the policy-making Federal Open Market Committee this year. But all Fed officials on the 19-member panel get to participate in the discussions.
Dennis Lockhart, who is a committee voting member, said in a speech Wednesday that should the economy deteriorate, “further monetary actions to support the recovery will certainly need to be considered.”
Lockhart did not specify what measures he thinks should be considered.
Richmond Federal Reserve Bank President Jeffrey Lacker has cast a lone dissenting vote at each of the Fed’s three meetings this year because he opposes its plan to keep short-term rates at record lows until at least late 2014.
Vincent Reinhart, chief U.S. economist at Morgan Stanley and formerly the Fed’s top staffer on interest-rate policy, is among a minority who think the Fed will take action this month. He also thinks the Fed will scale back its economic forecasts.
“Slower employment growth, worsening strains in European markets … makes it likely that the Fed will mark down its already tepid forecast,” Reinhart said in a note to clients.
With long-term U.S. interest rates at record lows, further Fed bond purchases might have little effect. But some economists think a Fed move would help keep rates down should investors decide to stop pouring so much money into U.S. Treasurys. Many investors have sought the safety of Treasurys as Europe’s crisis has flared. That money has helped drive down long-term U.S. rates.
Some economists say they think most Fed policymakers recognize that an economy facing such threats as slowing job growth and a European debt crisis needs rates to stay as low as possible.
“When you have an economy that is recovering as slowly as this one, it is really vulnerable to downside shocks,” said David Jones, chief economist at DMJ Advisors. “I think more monetary stimulus is not only on the table but likely to be used.”