Fed May Twist to Risk Management

With high unemployment and financial stress in Europe, the Fed is expected to tilt toward a risk management strategy.

Federal Reserve officials must choose this week between their best estimates and their worst fears of what will happen to the U.S. economy.

Policy makers will bring new forecasts to their June 19-20 meeting and probably will mark down their April central-tendency estimate for growth of 2.4 percent to 2.9 percent this year. Lurking in the background is the risk of increasing financial stress in Europe and stubbornly high U.S. unemployment that has remained above 8 percent for 40 consecutive months.

‘High Odds’

“We put high odds on them acting at the meeting,” said Reinhart, who was the head of the Fed board’s Division of Monetary Affairs, which develops policy strategy, under chairmen Greenspan and Bernanke. “Risk management says that you act in advance of a potential downdraft in activity because that could trigger” a collapse in demand that would be difficult to escape with the main policy rate at zero. The Fed cut the target for the federal funds rate to a record-low range between zero and 0.25 percent in December 2008.

Stable Inflation

Yellen’s outlook calls for a gradual reduction in the unemployment rate and stable inflation of around 2 percent, she said in a June 6 speech in Boston. Being patient with that forecast may not be desirable, she added.

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