May 23, 2018
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Fed divided over more stimulus as economy weakens

While construction of new homes continued in Cooper City, Fla. earlier this year, the home-building industry remains weak, like much of the rest of the economy.
By Martin Crutsinger, The Associated Press

WASHINGTON — Federal Reserve officials at their last meeting expressed concerns that the weakening job market might hold back the recovery. But members were divided over whether the Fed should consider taking additional steps to help the economy.

The Fed agreed at the June meeting to end on schedule its program to boost the economy through the purchase of $600 billion in Treasury bonds.

Some members said the Fed should be open to new stimulus measures if growth failed to pick up enough to “meaningfully” reduce the unemployment rate, according to minutes of the Fed’s June 21-22 meeting released Tuesday.

Others expressed concerns about inflation and said the central bank would need to take steps to begin removing its low-interest rate policies “sooner than currently anticipated.”

The minutes highlighted a division at the Fed between officials who are most worried that the economy is growing too slowly, including Fed Chairman Ben Bernanke, and some regional bank presidents who are concerned that the Fed’s policies could spark high inflation.

At the June meeting, the central bank ended up keeping its pledge to leave interest rates at exceptionally low levels for an extended period. But it also lowered its economic growth forecast for the second half of the year and said unemployment wouldn’t fall below 8.6 percent this year.

The bond-buying program was the Fed’s second round of “quantitative easing.” That’s a term economists use for a tool the Fed can use to drive down long-term interest rates by purchasing Treasury bonds. The first round was in March 2009, at the depths of the recession.

Supporters say the bond purchases kept rates low and encouraged spending. Critics charged that it weakened the dollar and increased the risk of higher inflation at a later date.

Paul Ashworth, chief U.S. economist at Capital Economics, said that the minutes showed that at the moment “there is little appetite among Fed officials for a third round” of easing. If the Fed launches a third round of bond buying, Ashworth said it likely will not occur until early next year. At that point, the Fed will have a better read on unemployment and inflation risks.

J.J. Kinahan, chief derivatives strategist at TD Ameritrade, said traders interpreted the minutes to say more stimulus was possible, but not probable. “I don’t think that anybody is 100 percent sold on the idea that there’s more stimulus on the way,” he said.

Bernanke will likely be pressed on the topic this week when he delivers his semiannual economic report to Congress. He appears before the House Financial Services Committee on Wednesday and the Senate Banking Committee the following day.

Fed policymakers met shortly after the government released its May employment report. Last week the government offered an even gloomier report for June.

The economy added just 18,000 jobs last month, the fewest in nine months. And the May data were revised downward to show just 25,000 jobs added — fewer than half of what was initially reported. The unemployment rate rose to 9.2 percent, the highest rate this year.

Companies have pulled back sharply on hiring after adding an average of 215,000 jobs per month from February through April. The economy typically needs to add 125,000 jobs per month just to keep up with population growth. And at least twice that many jobs are needed to bring down the unemployment rate.

After last month’s meeting, the Fed said in its policy statement that the economy had slowed, in part, because of higher energy prices and supply-chain disruptions caused by the Japan earthquake and tsunami.

But at a news conference after the meeting, Bernanke acknowledged that some of the economy’s problems are more long-lasting and go beyond temporary shocks.

At the meeting, the Fed also continued a discussion about how it would reverse policies adopted during the recession that pumped billions of dollars into the economy.

The officials generally agreed that the first step should be for the central bank to stop reinvesting money earned off its holdings of mortgages and Treasury securities The Fed would then modify the language in its more than two-year-old pledge to hold interest rates near zero for an extended period. And after that occurred, the next step would be to begin raising interest rates.

The Fed said that all but one participant agreed to its refined exit strategy. The lone dissenter was not named. The Fed said the exit discussion was undertaken “as part of prudent planning” and did not imply that any of the moves were imminent.

Many economists say they don’t expect the Fed will raise interest rates until next summer at the earliest. And some think the Fed will wait until 2013, based on the weak economy.

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