Chairman Ben S. Bernanke told lawmakers last week the “central question” confronting the Federal Reserve at its next meeting is whether growth is fast enough to make “material progress” reducing unemployment.

The answer may well be no.

Bernanke and his fellow policy makers gather June 19-20 to revise their economic projections after a report yesterday showing retail sales fell for a second month in May prompted economists at Goldman Sachs Group Inc. and Morgan Stanley to cut their growth forecasts. Fed officials, including Vice Chairman Janet Yellen, have said there's scope for further easing at some point to reduce a 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-based JPMorgan Chase & Co. and a former researcher for the Federal Reserve Board in Washington. “Bernanke has a clear economic mandate, and we're still far from achieving it.”

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

Investors Fled

Since the Federal Open Market Committee met on April 25, the yield on the benchmark 10-year Treasury note has fallen 36 basis points, or 0.36 percentage point, to 1.63 percent as investors fled risks in Europe and saw greater odds of new Fed accommodation. The Standard & Poor's 500 Index during the same period has slumped 4.8 percent to 1,324.65 at 12:25 p.m. in New York.

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

Yellen said on June 6 that any new Fed accommodation may entail purchasing bonds or extending a program to lengthen the average maturity of the Fed's portfolio of debt known as Operation Twist. A declining job market and deteriorating financial-market conditions show the U.S. economy “remains vulnerable to setbacks.”

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

Evans Comments

Chicago Fed President Charles Evans said on June 11 he would favor “pretty much any accommodative policy,” including buying bonds and extending Operation Twist, comments that helped push stocks higher.

In April, Fed policy makers raised the outlook for growth this year to a range of 2.4 percent to 2.9 percent, according to their central tendency forecasts, which exclude the highest and lowest estimates. In January, they predicted growth of 2.2 percent to 2.7 percent.

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

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

Growth Forecasts

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

The central bank has already purchased $2.3 trillion of bonds in two rounds of so-called quantitative easing, while keeping the benchmark interest rate at a record low just above zero since December 2008.

Still, the unemployment rate climbed to 8.2 percent in May from 8.1 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 down from 275,000 in January. The Fed in April projected an unemployment rate of 7.8 percent to 8 percent this year and 7.3 percent to 7.7 percent in 2013.

Jobless Claims

In another sign of a struggling job market, Labor Department data today showed that first-time claims for unemployment benefits unexpectedly climbed by 6,000 last week to 386,000. A separate Labor Department report showed that the consumer-price index declined 0.3 percent in May, the most in three years, giving Fed policy makers more room to stimulate growth.

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

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

“The economy itself is running at what many people consider to be a subpar type growth level,” Meline said at a conference hosted by Deutsche Bank AG. The flagging economy makes boosting sales “a more difficult challenge.”

Bernanke's Challenge

Presidents at Fed district banks have clashed this month over whether the economy needs more stimulus, highlighting the challenge Bernanke would face next week building a consensus behind any shift in policy.

Dallas Fed President Richard Fisher has repeatedly opposed further easing, arguing on June 5 the Fed would be “pushing on a string” and risk fueling perceptions that it's encouraging government spending.

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

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

Bloomberg News

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Fed Growth Outlook Key to Easing

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