A few Federal Reserve policy makers said the central bank will probably need to take more action to boost the labor market and meet its inflation target, according to minutes of their June meeting.
“A few members expressed the view that further policy stimulus likely would be necessary to promote satisfactory growth in employment and to ensure that the inflation rate would be at the Committee’s goal,” according to the record of the Federal Open Market Committee’s June 19-20 gathering released today in Washington.
Stocks fell as the report disappointed investors looking for a stronger signal that additional stimulus was likely. Fed Chairman Ben S. Bernanke last month said policy makers were prepared to “take additional steps” to boost the economy following their decision to extend the Operation Twist program aimed at lowering long-term interest rates.
“The Fed is being cautious,” said Mark Vitner, senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “We are not at the threshold yet to justify additional securities purchases and a further increase in the balance sheet. We have to wait for a more of a slowdown before the Fed will act.”
The Standard & Poor’s 500 Index (SPX) fell as much as 0.6 percent after the release before closing 0.02 point lower at 1,341.45 at 4 p.m. in New York, posting a fifth-straight retreat. The yield on the benchmark 10-year Treasury note rose to 1.51 percent from 1.50 percent yesterday.
Bond Purchases
Two participants said additional bond purchases are appropriate, while two others said they would be warranted in the absence of “satisfactory progress” in cutting unemployment or if downside risks increase. FOMC members also said strains in global markets stemming from Europe’s debt crisis had increased since their April meeting, and that “U.S. fiscal policy would be more contractionary than anticipated.”
The minutes also show policy makers considering the risk that further easing might pose. Some members of the committee noted that excessive purchase of Treasuries could “at some point, lead to deterioration in the functioning of the Treasury securities market that could undermine the intended effects of the policy.”
Minutes of the meetings don’t identify participants by name and sometimes use qualitative terms to describe how many hold a certain view. “A few” means two or three, and “a number” means four or five, according to Roberto Perli, a former senior staff economist in the central banks’ division of monetary affairs, which drafts the language in the Fed’s communications.
Low Risk
Members agreed the risk of such a deterioration was “low at present” and would be outweighed by the benefits of extending the Operation Twist program.
In their discussion of policy, a few members said it would be “helpful to have a better understanding” of how large purchases would have to be to disrupt the Treasury market.
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 “noted the importance of undertaking adequate preparations to address such spillovers if they were to occur.”
The FOMC met before a Labor Department report last week showing that companies hired 80,000 workers in June, fewer than forecast, and the unemployment rate held at 8.2 percent for a second month. Growth in private employment, which excludes government agencies, was the weakest in 10 months.
Growth Outlook
Policy makers in June also lowered their outlook for economic growth and employment. They said they expect the jobless rate to average 8 percent to 8.2 percent in the fourth quarter of this year. The rate has been stuck above 8 percent since February 2009.
The FOMC at the last meeting said it will extend Operation Twist by swapping $267 billion of shorter-term securities with the same amount of longer-term debt. The announcement extended the previous $400 billion program introduced in September. The Fed also repeated that its key interest rate was likely to stay near zero at least through late 2014.
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.”
High Uncertainty
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.
Fed officials continued their discussions of communications policies at the June meeting, and noted that the economic and interest rate forecasts they give to the public do not provide guidance “about how those diverse views come together” in the FOMC statement.
“Many participants indicated that if it were possible to construct a quantitative economic projection and associated path of appropriate policy that reflected the collective judgment of the Committee, such a projection could potentially be helpful,” the minute said.
Bernanke asked the communications subcommittee to “explore the feasibility” of developing a consensus forecast of the FOMC.
Since the June jobs report, San Francisco Fed President John Williams and the Chicago Fed’s Charles Evans said that the central bank could add additional stimulus through a third round of asset purchases, this time including housing debt.
"Effective Tool"
“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.
Recent data have pointed to slowing growth. Manufacturing unexpectedly shrank in June for the first time since the economy emerged from a recession three years ago, according to a July 2 report from the Institute for Supply Management. A June 29 Commerce Department report showed that consumer spending stalled in May.
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.
Fed officials have identified the European debt crisis and the so-called fiscal cliff in the U.S. as risks to the economic outlook. More than $600 billion in higher taxes and spending cuts will take effect in 2013 unless Congress acts.
China, Europe
Central banks cut interest rates and boosted bond buying to prop up economic growth on July 5. The European Central Bank and People’s Bank of China cut their benchmark borrowing costs, while the Bank of England raised the size of its asset-purchase program. The steps by the U.K. and euro area pushed JPMorgan Chase & Co.’s average interest rate for developed economies to a crisis-era low of 0.48 percent.
The outlook for residential real estate has continued to improve, with prices falling in April at the slowest pace in more than a year. The S&P/Case-Shiller index of property values in 20 cities dropped 1.9 percent in April from the same month in 2011, the smallest decline since November 2010, after decreasing 2.6 percent in the year ended March, the group said.
Auto Companies
General Motors Co. (GM), Ford Motor Co. and Chrysler Group LLC reported U.S. sales for June that beat analyst estimates, helping the industry stay on pace for the best year since 2007. Sales accelerated to a 14.1 million seasonally adjusted annualized rate, according to researcher Autodata Corp.
That recovery is at risk if the economy continues to deteriorate, according to Kurt McNeil, U.S. vice president of sales operations at Detroit-based Ford. The pace of U.S. sales remains below the 16.8 million annual total average from 2000 to 2007, according to Autodata.
“We certainly need a stronger economy and more job creation to continue driving auto sales back to pre-recession levels,” McNeil said on a conference call following the July 3 U.S. sales report. “We still see headwinds but at the end of the day we’re calling for moderate, gradual economic growth.”
"Federal" Reserve: More Stimulus Probably Needed
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