WASHINGTON – A growing number of Federal Reserve officials are open to taking further action to support the struggling U.S. economy. But minutes of the Fed’s latest meeting show policymakers at odds over whether the economy needs more help now.
At the June 19-20 meeting, “a few” members of the Fed’s policymaking committee said the economy may already require more support, the minutes show. That seemed to signal a shift from the Fed’s April meeting, when those who were open to further action said it depended on the economy worsening.
Yet it’s far from clear that the Fed will announce any new steps soon. “Several” members of the committee still said in June that they’d support more stimulus only if the economy deteriorated or inflation ran below the Fed’s target rate, the minutes show.
Some analysts have also suggested that the Fed may be reluctant to be aggressive in an election year out of concern it could be seen as affecting the vote in November.
Since the Fed met last month, the job market’s weakness has persisted. The government said Friday that hiring in June slumped for a third straight month. The economy added just 80,000 jobs, and the unemployment rate was steady at 8.2 per cent.
David Jones, chief economist at DMJ Advisors, said he didn’t think Fed officials would have announced any new action at its June meeting even if they’d known how weak the June employment report would be.
Jones said he thinks the Fed will eventually launch a new bond buying program to try to drive down long-term interest rates and encourage borrowing and spending. But he says the timing remains hazy.
“These minutes show that there is still a very deep division within the Fed,” Jones said.
Stock prices sank after the minutes were released at 2 p.m. Eastern time. At one point, the Dow Jones industrial average had lost 118 points, after being down only slightly earlier. Yet by the time trading ended at 4 p.m., the Dow had shed just 48 points.
Many economists think the Fed won’t announce any new steps at its next meeting July 31-Aug. 1. They think officials will hold off for at least one more meeting and give the job market a little longer to show improvement. If the economy doesn’t improve, the Fed could announce some new action at its Sept. 12-13 meeting.
Since the recession, the Fed has bought more than $2 trillion in Treasury bonds and mortgage-backed securities, expanding its portfolio to more than $2.8 trillion.
In the meantime, Jones said the Fed might decide at its next meeting to extend its timetable for when it plans to increase short-term interest rates. The Fed now plans to keep a key short-term rate at a record low until at least late 2014. Jones said officials might push that target into 2015 to reassure investors that borrowing costs will stay low even longer than expected.
The Fed’s internal debate over whether to further stimulate the U.S. economy comes as central bankers overseas are trying to invigorate their sagging economies. Last week, the European Central Bank cut its benchmark rate to a record low, the Bank of England bought more government bonds and China’s central bank cut rates for the second time in a month.
At last month’s Fed meeting, officials signalled their concern that the struggling U.S. economy could worsen if Congress fails to avert tax hikes and across-the-board spending cuts that kick in at the end of the year. And they expressed worries that Europe’s debt crisis will weigh on U.S. growth.
More stimulus “won’t become a reality unless the recovery loses even more momentum or a more severe flare-up in the euro-zone crisis raises the already elevated downside risks,” said Paul Ashworth, chief U.S. economist at Capital Economics.
Members said the economy will likely continue to grow moderately. But the Fed lowered its growth forecast at the June meeting, noting that the U.S. job market had weakened and consumer spending slowed. It also said it didn’t expect the unemployment rate to fall much further this year.
Some members noted that defence contractors are already laying plans for layoffs if lawmakers don’t address the package of tax hikes and spending cuts by the end of the year. Members warned that tighter government spending could slow the economy well into next year.
At the meeting, the Fed extended a program that shifts its bond portfolio to try to lower long-term interest rates. Policymakers left open the possibility of providing further help, such as launching a new program of bond purchases.
Chairman Ben Bernanke may offer further guidance on the Fed’s plans next week when he delivers the central bank’s updated economic assessment to Congress. After the June meeting, Bernanke told reporters he was open to another round of bond purchases if the job market didn’t improve.