Fed sees slowing in economic recovery
Federal Reserve policymakers, acknowledging a slowing in the economic recovery at their meeting in late June, began to consider the possibility of providing additional stimulus if growth fell sharply — a possibility that has become all the more real as signs of weakness have piled up.
Minutes of the Fed’s June 22-23 meeting, released Wednesday, indicate that while board members discussed the need for a contingency plan, they did not raise major new concerns about the economy.
In fact, even as Fed members noted the debt problems in Europe and the weak U.S. job market, they made only a tiny downgrade in their forecast for moderate economic growth this year and acceleration in 2011.
But that was before the release of a string of data in recent days that have pointed to further deterioration in key drivers of the economy, including consumer spending, housing and even manufacturing.
Adding to that, the government reported Wednesday that retail sales fell in June for the second straight month, with car dealers, furniture outlets and building-supply stores all taking a hit. And analysts expect the Fed’s report Thursday on factory production to show that it lost some steam last month, confirming other recent reports.
In its June meeting, the Fed “did not foresee the weakness that has developed” since then, said Lyle Gramley, a former Fed governor who is a senior economic consultant at the Potomac Research Group. But he expects policymakers to express significantly stronger concerns about the economy at their next meeting Aug. 10.
Most analysts agree that it would take a sharp decline in key economic indicators before Fed officials would seriously contemplate further stimulus measures, especially given that any additional action by the Fed is likely to have only limited effect.
The central bank’s short-term interest rate already is near zero, and mortgage rates, which the Fed has helped to drive down by purchasing certain securities, are also at historical lows.
Moreover, some Fed members are reluctant to take steps that will further boost the central bank’s already oversized assets, which present potential inflation and other problems down the road.
“There isn’t really that much more it can do at the moment anyway,” said Paul Ashworth, a senior U.S. economist at Capital Economics.
For most of this year, discussions about the Fed’s stimulus programs have been focused on the need for a so-called exit strategy, the point at which the central bank would begin tightening credit and reduce the money supply to lower the risk of inflation.
But with the economic recovery proceeding more slowly than anticipated, some Fed members expressed more concern about the risk of falling wages and prices, or deflation, according to the minutes of the June meeting, which was released with the usual three-week lag.
Fed policymakers in June projected that U.S. gross domestic product would grow 3% to 3.5% this year, down slightly from the range of 3.2% to 3.7% in their prior meeting in April. That was the first downward projection in more than a year.
However, recent economic data suggest that even these estimates are too optimistic.
The nation’s GDP, a broad measure of total economic output, expanded at an annual rate of 2.7% in the first quarter. And by most measures, GDP in the second quarter looks to be below 3% as well, with weakening momentum heading into the second half of the year.
A major economic concern is that federal fiscal stimulus, such as spending for highway and bridge projects, is expected to largely end this year, removing an important support for the economy.
At the same time, budget-strapped local and state governments are cutting back and putting further strains on an economy that is already burdened with near double-digit unemployment, consumers who remain heavily indebted and many businesses that either are too worried to invest or can’t get credit to do so.