Chairman Ben S. Bernanke told lawmakers last week the “centralquestion” confronting the Federal Reserve at its next meeting iswhether growth is fast enough to make “material progress” reducingunemployment.

The answer may well be no.

Bernanke and his fellow policy makers gather June 19-20 torevise their economic projections after a report yesterday showingretail sales fell for a second month in May prompted economists atGoldman Sachs Group Inc. and Morgan Stanley to cut their growthforecasts. Fed officials, including Vice Chairman Janet Yellen,have said there's scope for further easing at some point to reducea jobless rate persisting above 8 percent.

“They're not closing that employment gap as fast as they'd like,so I suspect it adds up to more action to get things moving again,”said Michael Feroli, chief U.S. economist at New York-basedJPMorgan Chase & Co. and a former researcher for the FederalReserve Board in Washington. “Bernanke has a clear economicmandate, and we're still far from achieving it.”

Economists at Goldman Sachs yesterday reduced their trackingestimate for U.S. second-quarter growth to 1.6 percent from 1.8percent. Morgan Stanley cut its projection 0.2 percentage point, to1.8 percent, while Credit Suisse Group AG marked down growth forthe period to 2.2 percent from 2.5 percent.

Investors Fled

Since the Federal Open Market Committee met on April 25, theyield on the benchmark 10-year Treasury note has fallen 36 basispoints, or 0.36 percentage point, to 1.63 percent as investors fledrisks in Europe and saw greater odds of new Fed accommodation. TheStandard & Poor's 500 Index during the same period has slumped4.8 percent to 1,324.65 at 12:25 p.m. in New York.

The FOMC will gather two days after a June 17 national electionin Greece that risks the country's exit from the euro, an outcomethat would deepen a crisis the Fed has identified as a chief threatto the U.S. expansion.

Yellen said on June 6 that any new Fed accommodation may entailpurchasing bonds or extending a program to lengthen the averagematurity of the Fed's portfolio of debt known as Operation Twist. Adeclining job market and deteriorating financial-market conditionsshow the U.S. economy “remains vulnerable to setbacks.”

“I am convinced that scope remains for the FOMC to providefurther policy accommodation,” Yellen said. “It may well beappropriate to insure against adverse shocks that could push theeconomy into territory where a self-reinforcing downward spiral ofeconomic weakness would be difficult to arrest.”

Evans Comments

Chicago Fed President Charles Evans said on June 11 he wouldfavor “pretty much any accommodative policy,” including buyingbonds and extending Operation Twist, comments that helped pushstocks higher.

In April, Fed policy makers raised the outlook for growth thisyear to a range of 2.4 percent to 2.9 percent, according to theircentral tendency forecasts, which exclude the highest and lowestestimates. In January, they predicted growth of 2.2 percent to 2.7percent.

A reduction in forecasts for growth and employment at nextweek's meeting would help Bernanke justify more accommodation,either at the end of this or subsequent FOMC meetings, economistssaid.

“What he needs to see is growth become established at a 3percent or faster rate to bring the unemployment rate down at adecent clip,” said John Ryding, co-founder of RDQ Economics LLC inNew York and a former Fed researcher. “The chairman is sympatheticto the perspective that the Fed should do more to promotegrowth.”

Growth Forecasts

Wall Street analysts said the economy will expand at a 2.2percent rate in 2012, according to the median response of 70economists surveyed by Bloomberg News from June 1 to June 5. That'sdown from 2.3 percent in April and May surveys.

The central bank has already purchased $2.3 trillion of bonds intwo rounds of so-called quantitative easing, while keeping thebenchmark interest rate at a record low just above zero sinceDecember 2008.

Still, the unemployment rate climbed to 8.2 percent in May from8.1 percent in April, a Labor Department report showed on June 1.The economy added 69,000 jobs in May, the fewest in a year and downfrom 275,000 in January. The Fed in April projected an unemploymentrate of 7.8 percent to 8 percent this year and 7.3 percent to 7.7percent in 2013.

Jobless Claims

In another sign of a struggling job market, Labor Departmentdata today showed that first-time claims for unemployment benefitsunexpectedly climbed by 6,000 last week to 386,000. A separateLabor Department report showed that the consumer-price indexdeclined 0.3 percent in May, the most in three years, giving Fedpolicy makers more room to stimulate growth.

The FOMC's focus is “clearly the outlook and the risks to theoutlook,” said Julia Coronado, a former Fed economist who is nowchief economist for North America at BNP Paribas SA in New York.Risks are “skewed to the downside, so we think the Fed's probablygoing to be inclined to take out some insurance with someadditional balance-sheet action.”

3M Co. Chief Financial Officer David Meline said yesterday theweak economy may mean lower volume growth for the St. Paul,Minnesota-based maker of products including fuel-system tuneup kitsand Post-it Notes.

“The economy itself is running at what many people consider tobe a subpar type growth level,” Meline said at a conference hostedby Deutsche Bank AG. The flagging economy makes boosting sales “amore difficult challenge.”

Bernanke's Challenge

Presidents at Fed district banks have clashed this month overwhether the economy needs more stimulus, highlighting the challengeBernanke would face next week building a consensus behind any shiftin policy.

Dallas Fed President Richard Fisher has repeatedly opposedfurther easing, arguing on June 5 the Fed would be “pushing on astring” and risk fueling perceptions that it's encouraginggovernment spending.

San Francisco Fed President John Williams, who votes on policythis year, said on June 6 the “disappointing” payrolls report forMay didn't change his expectation for jobs growth. Still, thecentral bank should stand ready to act if the recovery falters, hesaid.

Atlanta's Dennis Lockhart, another voting member for 2012, andJames Bullard of St. Louis have signaled a preference to waitbefore making any policy changes. Bullard and Fisher don't hold apolicy vote in this year.

Bloomberg News

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