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Fed Signals Support for Further Stimulus If Economy Slows

iJZnUt8GuZ6k Fed Signals Support for Further Stimulus If Economy Slows

The Federal Reserve signaled that a
further economic slowdown would bring growing support among
policy makers for additional steps to spur the three-year

A few members of the Federal Open Market Committee said the
Fed should ease policy to move the economy toward its targets
for full employment and stable prices, according to minutes of
the June 19-20 meeting released yesterday in Washington. Several
others said more action could be warranted if growth slows,
risks intensified or inflation seemed likely to fall
“persistently” below their goal.

“You have a majority to do a lot more with even a small
downward revision in the forecast,” said Joe Gagnon, who worked
as an associate director at the Fed Board’s Division of
International Finance from 1999-2008. Gagnon, a senior fellow at
the Peterson Institute for International Economics in
Washington, said the Fed’s next move could come as early as the
Sept. 12-13 meeting.

As Chairman Ben S. Bernanke and fellow policy makers
extended their Operation Twist program through the end of the
year, they debated whether additional steps such as a third
round of asset purchases, known as quantitative easing, might be
needed. Some said there was a risk that buying more Treasuries
might eventually disrupt the government debt market.

The FOMC met before the Labor Department reported last week
that employers added 80,000 jobs to payrolls in June, fewer than
economists forecast, while the jobless rate was unchanged at 8.2
percent, the 41st consecutive month above 8 percent. Other
reports showed manufacturing shrank in June for the first time
since the recovery began and consumer spending stalled in May.

‘Poor Results’

“It’s more than just the dovish branch of the voting
membership that appears to be signing on to the idea of QE3 if
the economy loses momentum,” said Dana Saporta, U.S. economist
for Credit Suisse in New York. “We do know that since that
meeting, we’ve gotten some poor results, most noticeably the
June employment report.”

The Standard Poor’s 500 Index (SPX) fell less than 0.1 percent
to 1,341.45 at the close of trading in New York after declining
as much as 0.6 percent. The yield on the 10-year Treasury note
rose to 1.52 percent from 1.5 percent the day before.

The minutes showed 15 FOMC participants said the risks to
the economy were weighted to the downside in June, up from eight
in April. Thirteen said the risks to the unemployment rate were
weighted to the upside, up from nine in April.

Voting Seats

The Fed’s 19 presidents and governors take part in each
FOMC meeting, while only 12 have votes at any given time. The
seven governors and New York Fed president have permanent votes,
while the other Fed presidents rotate among four voting seats.

Several Fed policy makers said the central bank should
“explore the possibility of developing new tools to promote
more accommodative financial conditions and thereby support a
stronger economic recovery,” without specifying what those
tools might be.

“They’ve intensified their concerns about the downside
risk, and they’re talking about additional tools,” said Michael Hanson, senior U.S. economist at Bank of America in New York.

The FOMC decided to extend Operation Twist by swapping $267
billion of shorter-term securities with the same amount of
longer-term debt. The program is intended to reduce long-term
interest rates. The Fed also repeated that its key interest rate
was likely to stay near zero at least through late 2014.

Fed Chairman Ben S. Bernanke, at a press conference after
the meeting, said policy makers were prepared to “take
additional steps” to boost the economy.

‘Modest’ Effect

Several central bankers said that extending Operation Twist
was likely to have a “modest” effect on already low interest
rates. Richmond Fed President Jeffrey Lacker dissented from the
decision, arguing that the move would do little to help growth
or employment.

While some policy makers expressed concern excessive
purchase of Treasuries could “at some point, lead to
deterioration” in the government debt market, members agreed the
risk was “low at present” and would be outweighed by the
benefits of extending Operation Twist.

“They’re not entirely confident that the options they have
are good ones,” said Drew Matus, U.S. economist at UBS AG in
Stamford, Connecticut. “They’re being more open about their

Opens Door

Lou Crandall, chief economist at Wrightson ICAP LLC, said
the committee’s discussion of potential costs to the functioning
of the more than $10.5 trillion Treasury market opens the door
to renewed purchases of mortgage-backed securities.

“If you want to spread the impact, then you add another
market,” Crandall said.

The Fed lowered interest rates to zero in December of 2008
and initiated two rounds of large-scale asset purchases totaling
$2.3 trillion. In the first round the central bank purchased
Treasuries and housing debt, while it limited purchases to
Treasuries in the second round.

San Francisco Fed President John Williams and the Chicago
Fed’s Charles Evans this week said that the central bank could
add additional stimulus through a third round of asset
purchases, this time including housing debt guaranteed by
mortgage-finance companies Fannie Mae, Freddie Mac and Ginnie

“If further action is called for, the most effective tool
would be additional purchases of longer-maturity securities,
including agency mortgage-backed securities,” Williams said in
a July 9 speech in Coeur D’Alene, Idaho. Evans said he would
have favored the Fed taking stronger action in June.

Less Supportive

Participants at the meeting said financial conditions had
become less supportive of the economy as investors’ concerns
about the euro region’s sovereign-debt and banking crisis
increased. Policy makers said that strains in Europe could spill
over into the U.S. and saw the need of “undertaking adequate
preparations to address such spillovers if they were to occur.”

Nearly all policy makers judged uncertainty about economic
growth and unemployment to be higher than the normal level
during the previous 20 years, the minutes show.

Inflation is also falling below the Fed’s 2 percent goal.
Prices rose 1.5 percent from a year earlier in May, as measured
by the personal consumption expenditures price index. The
inflation gauge is the lowest since January 2011 and has dropped
from a 2011 peak of 2.9 percent in September.

“There’s a growing coalition of members who are inclined
to do more and who really feel that they’re failing to meet
their objectives,” said Jeffrey Greenberg, a U.S. economist at
Nomura Securities International LLC in New York. “They see the
unemployment rate and read that as a clear indication that
they’re not achieving the full employment aspect of the dual

To contact the reporters on this story:
Joshua Zumbrun in Washington at
[email protected];
Craig Torres in Washington at
[email protected]

To contact the editor responsible for this story:
Christopher Wellisz at
[email protected]

izQlKUzScARY Fed Signals Support for Further Stimulus If Economy Slows

Fed Signals
ix7AFkRemeZ0 Fed Signals Support for Further Stimulus If Economy Slows

Andrew Harrer/Bloomberg

The Marriner S. Eccles Federal Reserve building stands in Washington, D.C., U.S.

The Marriner S. Eccles Federal Reserve building stands in Washington, D.C., U.S. Photographer: Andrew Harrer/Bloomberg

 Fed Signals Support for Further Stimulus If Economy SlowsFed Minutes” class=”small_img img_keep_size” src=”” />

July 11 (Bloomberg) — Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ, talks about the minutes from the Federal Open Market Committee June 19-20 meeting and the outlook for the U.S. labor market.
He speaks with Mark Crumpton on Bloomberg Television’s “Bottom Line.” (Source: Bloomberg)

iHKnGB9.nIo0 Fed Signals Support for Further Stimulus If Economy Slows

July 11 (Bloomberg) — John Netto, president of M3 Capital LLC, talks about the Federal Open Market Committee’s June 19-20 meeting minutes released today and the implications for investors.
He speaks with Trish Regan and Adam Johnson on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)

ikpKJP3KRoKg Fed Signals Support for Further Stimulus If Economy Slows

July 11 (Bloomberg) — Bloomberg economist Joseph Brusuelas talks about the Federal Open Market Committee’s June 19-20 meeting notes released today and the market implications. (Brusuelas is a Bloomberg economist. The opinions expressed are his own. Source: Bloomberg)

isu66X2mP5do Fed Signals Support for Further Stimulus If Economy Slows

July 11 (Bloomberg) — A few Federal Reserve policy makers said the central bank will probably need to take further action to boost the labor market and meet its inflation target, according to minutes of their June meeting. Peter Cook reports on Bloomberg Television’s “Bottom Line.” (Source: Bloomberg)

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