The stage is set for further economic stimulus from the U.S. Federal Reserve, perhaps as soon as Wednesday, when the U.S. central bank’s policy committee concludes a two-day meeting that dominates the economic calendar this week.
Hope that the U.S. unemployment rate might drop below 8 per cent this year is diminished, if not lost.
Gross domestic product grew at an annual rate of 1.5 per cent in the second quarter, according to an initial government estimate released Friday.
That’s coasting speed, not the “escape velocity” needed to make the financial crisis a speck in the rear-view mirror.
The Fed is mandated to achieve “maximum employment,” which officials equate to an unemployment rate somewhere in the neighbourhood of 5.5 per cent.
With inflation expectations tethered at a rate well within the Fed’s comfort zone, the case for further stimulus measures easily could be made.
“Progress on bringing down the unemployment rate has probably slowed to a snail’s pace and perhaps even stalled,” John Williams, president of the Federal Reserve Bank of San Francisco and a voting member of the Fed’s policy committee, said last week.
“I expect little progress toward maximum employment over the next year or more,” Mr. Williams added.
At the Federal Open Market Committee’s last meeting in June, officials opted to extend a program aimed at keeping downward pressure on interest rates by selling shorter-term assets in the U.S. central bank’s investment portfolio for longer-dated ones.
Minutes of that meeting show a few policy makers wanted to be more aggressive, and “several” more thought stronger action could be necessary if the economic recovery lost momentum. (The FOMC has 19 members; seven from the Washington-based Federal Reserve Board and the presidents of the 12 regional Fed banks. While all contribute to the discussion, only 12 actually vote on policy.)
Economic indicators since June mostly have disappointed. The economy created 80,000 jobs in June, less than the amount needed to stay ahead of changes in the size of the work force, and the unemployment rate was 8.2 per cent, its level for two of the previous three months.
The Institute for Supply Management’s manufacturing index showed factory production contracted last month, a disheartening turn for an sector that had been leading the recovery. Retail sales also slumped in June, and readings of consumer and small-business confidence declined significantly.
“It is pretty clear that the economic recovery looks more fragile now than it did last month,” Paul Dales of research firm Capital Economics said in a report.
Still, Mr. Dales was not prepared to advise Capital’s clients to expect new stimulus measures this week. Economists at Deutsche Bank and Royal Bank of Canada are equally uncertain the Fed is ready to act at this point. There’s a feeling on Wall Street that policy makers want more time to assess whether the economy struck a soft patch in the spring, or is stuck in the mud.
After this week, the Fed’s policy committee is next scheduled to meet Sept. 12-13. Policy makers in September will revise their economic outlooks, a natural time to make a decision on whether more stimulus measures are needed.
Federal Reserve chairman Ben Bernanke also is scheduled to hold a press conference, which would give him the opportunity to explain a policy shift. (Many analysts also point to the annual Fed policy conference in Jackson Hole, Wyo., scheduled for Aug. 23-25, which has emerged as Mr. Bernanke’s preferred venue for signalling policy changes in recent years.)
Over two days of testimony on Capitol Hill earlier this month, Mr. Bernanke opened the door to the Fed’s armoury to counter arguments that the central bank is a spent force.
Mr. Bernanke said the Fed could, for a third time, create hundreds of billions of dollars to buy financial assets, a policy known as quantitative easing. He said the Fed also could reduce the interest rate it pays on banks’ deposits, lend directly to banks in order to boost business credit, or extend its conditional promise to keep its benchmark lending rate near zero until at least the end of 2014.
Importantly, Mr. Bernanke said he remained confident that any of those measures could make a difference if needed. Many Wall Street economists disagree with that sentiment, noting borrowing costs already are extremely low. But none of those economists swore an oath to do everything in their power to keep the unemployment rate low. With joblessness stuck above 8 per cent, and economic growth deteriorating, odds favour a Fed response.