Fed Leans toward More Easing

Bernanke signals that additional stimulus is likely if jobs growth falls short.

Chairman Ben S. Bernanke is signaling the Federal Reserve will probably add to its record stimulus should the economy fail to make sufficient progress in creating jobs for 12.7 million unemployed Americans.

The policy-setting Federal Open Market Committee yesterday extended its Operation Twist program and will swap $267 billion in short-term securities with longer-term debt through the end of 2012. Fed officials also downgraded their forecasts for growth and employment while noting “significant downside risks” to the economy.

Bernanke, speaking at a Washington press conference, said policy makers are focusing “primarily” on the outlook for jobs in deciding whether to ease further, and more action would be needed without “sustained improvement in the labor market.” Payrolls grew at the slowest pace in a year in May, and the jobless rate has been stuck above 8 percent since February 2009.

“If job growth doesn’t pick up from the recent soft readings in the next few months, then the Fed would likely do more and do a full scale asset-purchase program,” said Dean Maki, chief U.S. economist at Barclays Plc in New York and a former Fed economist. “They’re prepared to take further action.”

U.S. stocks slipped after the Fed cut its estimates for growth and Bernanke said progress in the labor market has slowed. The Standard & Poor’s 500 Index fell 0.2 percent to 1,355.69 in New York. The yield on the benchmark 10-year Treasury note rose four basis points, or 0.04 percentage point, to 1.66 percent.

“They’re on alert for confirmation that the labor market weakness is a passing phenomenon,” said Michael Feroli, chief U.S. economist for JPMorgan Chase & Co. in New York and a former Fed economist. “There is certainly a decent chance that we don’t see a rebound in the labor market, and then they’d act again.”

Job growth short of 100,000 a month would probably prompt a third round of large-scale asset purchases, while monthly payroll increases of about 150,000 would probably make such a program unnecessary, Maki said. The Fed has already bought $2.3 trillion of securities in two quantitative-easing programs.

Bernanke said in April that employment growth of 100,000 a month is needed for “stability” in the job market, and that payroll increases of about 150,000 to 200,000 were consistent with the Fed’s forecasts for joblessness.

The economy added 69,000 jobs in May, while the unemployment rate climbed to 8.2 percent from 8.1 percent in April. Fed officials predict unemployment of 8 percent to 8.2 percent at year-end, compared with an April projection of 7.8 percent to 8 percent. They expect joblessness of 7.5 percent to 8 percent in 2013, up from 7.3 percent to 7.7 percent.


Fiscal Tightening

Bernanke said the economy is vulnerable to looming U.S. fiscal tightening and fallout from the sovereign-debt crisis in Europe. The FOMC, which has kept its benchmark interest rate near zero since December 2008, reiterated yesterday it expects to keep rates “exceptionally low” at least through late 2014.

“Additional asset purchases would be among the things that we would certainly consider if we need to take additional measures to strengthen the economy,” Bernanke said. “Our tools, while they are non-standard, still can create more accommodative financial conditions, can still provide support for the economy, can still help us to return to a more normal economic situation.”

The Fed said it will sell Treasury securities maturing in about three years or sooner and purchase a comparable amount of securities due in six years to 30 years. The central bank announced the current $400 billion maturity-extension program on Sept. 21, and it is due to expire this month.

“Unemployment is still way too high and inflation is below target,” said Ward McCarthy, chief financial economist at Jefferies & Co. in New York. “The bottom line is that the Fed feels like they needed to do more, but at this point in time at least, they were reluctant to expand the balance sheet again.”

Richmond Fed President Jeffrey Lacker dissented for the fourth meeting in a row, saying he doesn’t support extending Operation Twist. He said last month the central bank will probably need to raise its benchmark rate next year.

Economic data in recent weeks have pointed to slowing growth. Retail sales fell 0.2 percent for a second month in May, according to a June 13 report from the Commerce Department, as elevated unemployment and the smallest wage gains in a year prompted consumers to curtail their spending.

Industrial production unexpectedly dropped in May for the second time in three months as factories turned out fewer vehicles and consumer goods, data from the Fed showed last week.


Growth Forecasts

Fed officials see growth ranging from 1.9 percent to 2.4 percent this year, down from an April forecast of 2.4 percent to 2.9 percent, according to their so-called central tendency estimates, which exclude the three highest and three lowest projections.

The FOMC may be taking an approach closer to that advocated by Chicago Fed President Charles Evans by placing more emphasis on creating jobs, said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.

In April, the FOMC said it “will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.” That language was two- sided because the committee could also shrink the balance sheet to keep prices stable, Crandall said.

In their statement yesterday, policy makers pledged “further action as appropriate” to promote a stronger recovery and “sustained improvement” in the labor market, a one-sided bias toward further easing, Crandall said.

“They sharpened the conditionality and took a step toward Evans’s view that the Fed should explicitly link its policy plans to progress on employment,” he said.

The FOMC also said yesterday that inflation “has declined, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.” Oil prices tumbled to an eight month-low yesterday of $81.80 a barrel after U.S. inventories climbed to a 22-year high.

Fed officials project inflation of 1.2 percent to 1.7 percent this year, down from an April prediction of 1.9 percent to 2 percent.

The commitment to more stimulus if labor markets don’t improve is a “notable addition” to the statement, said Roberto Perli, managing director of policy research at International Strategy & Investment Group in Washington.


Easing Bias

“It focuses them even more on the labor market, and it does suggest there is a bias toward further easing,” said Perli, who worked in the Fed’s Division of Monetary Affairs under Bernanke.

Federal Reserve Bank of New York President William C. Dudley, who is also vice chairman of the FOMC, said May 24 that he’d “like to see payroll gains in the 300,000 a month” range for “a while.”

“The Chairman mentioned 10 times that they are prepared to do more, so clearly the bias is still towards even more easing,” said Julia Coronado, chief economist for North America at BNP Paribas in New York. Coronado, a former Fed economist, said there’s “more than a 50-50 chance” the Fed will provide more accommodation.


Bloomberg News


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