Fed May Pass On More Stimulus Amid Signs of Weakness

Federal Reserve policy makers signaled they will probably pass on providing more stimulus at their Aug. 10 meeting and wait to see if signs of weaker economic growth persist.

Chairman Ben S. Bernanke told lawmakers in South Carolina yesterday that consumer spending is “likely to pick up” amid a “moderate” expansion. St. Louis Fed President James Bullard said on July 29 that he expects the “recovery will continue through the fall.” Three days earlier, Philadelphia Fed President Charles Plosser said in a Bloomberg News interview that calls for more Fed stimulus “are premature.”

Officials indicated they may ease more should the economy falter after reports of a flagging housing industry and persistently high jobless rate. Options include strengthening the pledge to keep interest rates around zero, cutting the rate the Fed pays on excess bank reserves, or buying more Treasuries or mortgage bonds. No consensus has emerged among policy makers for any of those actions, remarks by officials show, and Bernanke didn’t mention them in a speech yesterday.

“You have to get a significant downward revision to their forecast that spills over into next year” to get the Federal Open Market Committee to vote for more easing, says Laurence Meyer, a former Fed governor and vice chairman of forecasting firm Macroeconomic Advisors LLC in Washington.

“The only thing that could push the committee to ease, or a signal that tightening is even further off, might be a worse- than-expected employment report,” he said.

Downside Risks

Still, one FOMC option would be to change part of its statement to stress it is attentive to downside risks. Economic reports after the August meeting confirming a significant slowdown would prime investor expectations for some Fed action in September.

U.S. Treasuries rose today, pushing the yield on two-year notes down to 0.53 percent at 9:35 a.m. in New York after dropping to a record low for a third straight day, touching 0.522 percent. Against the euro, the dollar slipped 0.4 percent to $1.3235 after reaching $1.3262, the weakest since May 3.

A U.S. government report today showed consumer spending and personal incomes unexpectedly stagnated in June. Purchases were little changed following a 0.1 percent gain the prior month that was smaller than previously estimated, Commerce Department figures showed today in Washington. Incomes didn’t increase for the first time since September and the savings rate rose to a one-year high.

Added Jobs

Companies added 90,000 jobs last month, according to the median estimate in a Bloomberg News survey of economists. The unemployment rate is forecast to rise to 9.6 percent.

“They would need to see a couple of months of bad labor market data and bad spending data” before easing further, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. and a former member of the forecasting team for the Fed Board of Governors.

Fed officials and economists are trying to determine the economy’s trend from a stream of uneven data that may signal a pullback following investor concerns about a possible European default in May.

Manufacturing slowed last month, according to the Institute for Supply Management’s manufacturing gauge which fell to 55.5 last month from 56.2 in June. High unemployment is weighing on household consumption and sentiment. The Conference Board’s consumer sentiment index fell to 50.4 last month, the lowest level in five months, figures from the New York-based private research group showed.

Slow GDP

Weaker consumer spending helped slow gross domestic product to a 2.4 percent annual pace in the second quarter, less than forecast, after a 3.7 percent first-quarter gain that was larger than previously estimated.

Financial market conditions have improved, which should help channel the Fed’s low-rate policy to consumers and business.

U.S. corporate bond sales set a record last month and yields on the debt fell to the lowest in more than four years. Investors are snapping up the debt as 77 percent of companies in the Standard & Poor’s 500 Index that have reported second- quarter earnings beat analysts’ estimates.

The S&P 500 fell 0.3 percent to 1,122.32 at 9:35 a.m. in New York trading. In July the index rose 6.9 percent in the best monthly gain in a year.

If the economy was approaching another recession, “you presumably would not see stock markets like the ones we’ve been seeing,” said Neal Soss, chief economist at Credit Suisse in New York and a former aide to former Fed Chairman Paul Volcker.

Contingency Planning

“Against that sort of backdrop, it strikes me that the urgency from the Fed’s point of view is reduced rather than increased,” he said. “That doesn’t mean they shouldn’t have contingency planning under way.”

The Fed signaled in June that Europe’s debt crisis may harm U.S. growth and repeated a pledge to keep interest rates near zero “for an extended period.” The central bank cut the benchmark interest rate almost to zero in December 2008 and turned to purchases of Treasury, housing-agency and mortgage- backed securities as the main tool of monetary policy.

Fed officials will leave the rate unchanged again at the August meeting, according to economists surveyed by Bloomberg News last month.

Policy makers in June expected the economy to expand at rates fast enough to bring down the unemployment rate. Growth in 2011 should be in a range of 3.5 percent to 4.2 percent, according to their central tendency forecasts, and 3.5 percent to 4.5 percent in 2012. The central tendency removes the three highest and three lowest forecasts from committee members.

Unemployment should average 8.3 to 8.7 percent in the final three months of next year, and fall about another percentage point to 7.1 percent to 7.5 percent by 2012.

“The Fed has had a bit more optimistic view for some time” compared to Wall Street forecasters, said Michael Hanson, senior economist at Bank of America Merrill Lynch in New York.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net; Scott Lanman in Washington at slanman@bloomberg.net;

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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