Fed divided over additional stimulus
WASHINGTON - At their most recent meeting, Federal Reserve officials expressed concerns that the weakening job market might hold back the recovery. But they were divided over whether the Fed should take additional steps to help the economy.
The Fed agreed to end on schedule its program to boost the economy through the purchase of $600 billion in Treasury bonds.
Some members said the Fed should be open to new stimulus measures if growth failed to pick up enough to “meaningfully’’ reduce the employment rate, according to minutes of the June 21-22 meeting, released yesterday.
Others expressed concerns about inflation and said the central bank would need to take steps to begin removing its low-interest rate policies “sooner than currently anticipated.’’
The minutes highlight a division between officials who are worried the economy is growing too slowly, including chairman Ben Bernanke, and some regional bank presidents who are concerned the Fed’s policies could spark high inflation.
The central bank ended up keeping its pledge to leave interest rates at exceptionally low levels for an extended period. But it also lowered its growth forecast for the second half of the year and said unemployment would not fall below 8.6 percent this year.
The bond-buying was the Fed’s second round of “quantitative easing.’’ That’s a term economists use for a tool the Fed can use to drive down long-term interest rates by purchasing Treasury bonds. The first round was in March 2009, in the depths of the recession.
Supporters say the bond purchases kept rates low and encouraged spending. Critics say they weakened the dollar and increased the risk of inflation.
Paul Ashworth, chief US economist at Capital Economics, said the minutes show “there is little appetite among Fed officials for a third round’’ of easing. If the Fed launches a third round of bond buying, Ashworth said, it probably will not occur until early next year. At that point, the Fed will have a better read on unemployment and inflation.
J.J. Kinahan, chief derivatives strategist at TD Ameritrade, said traders interpreted the minutes to say more stimulus was a possibility, but not probable. “I don’t think that anybody is 100 percent sold on the idea that there’s more stimulus on the way,’’ he said.
Bernanke will probably be pressed on the topic today and tomorrow when he delivers his semiannual economic report to Congress.
The economy added just 18,000 jobs last month, the fewest in nine months. And the May data were revised downward to show just 25,000 jobs added - fewer than half of what was initially reported. The unemployment rate rose to 9.2 percent, the highest rate this year.
The economy typically needs to add 125,000 jobs per month just to keep up with population growth. And at least twice that many jobs are needed to bring down the unemployment rate.
Many economists say they don’t expect the Fed to raise interest rates until next summer, at the earliest. And some think the Fed will wait until 2013.