Fed Will Likely Weigh Rosengren’s Call for Stimulus
Some Federal Reserve policy makers may join Boston Fed President Eric Rosengren in backing new stimulus at a meeting this month after unemployment rose to 8.2 percent in May, economists said.
Rosengren said the Fed should further its full-employment mandate and extend beyond June a program known as Operation Twist, which lengthens the average duration of bonds on its balance sheet. He spoke before a report yesterday showed the U.S. added 69,000 jobs in May, the fewest in a year, pushing the yield on 10-year Treasury notes to a record low.
“The May report does significantly raise the odds of further easing from the Fed,” said Dean Maki, New York-based chief U.S. economist at Barclays Plc and a former Fed economist. “There will be a case made at the June meeting for easing.”
Rosengren’s stimulus call aligns with the view of Chicago Fed President Charles Evans. Any job market setback is also a chief concern of Chairman Ben S. Bernanke, who said in April the Fed may provide more accommodation should unemployment fail to make “sufficient progress towards its longer-run normal level.” Fed policy makers plan to meet June 19-20.
Yesterday’s report from the Labor Department “does change the game, certainly in terms of Operation Twist,” said John Silvia, chief economist at Wells Fargo & Co. in Charlotte, North Carolina. “Because the slowdown in the economy has been fairly rapid compared to what they expected, they’ll go ahead and extend Operation Twist.”
The yield on the 10-year Treasury note closed at a record low 1.45 percent yesterday, from 1.56 percent on May 31. The yield fell to as low as 1.4387 percent. The Standard & Poor’s 500 Index tumbled 2.5 percent to 1,278.04 in the steepest retreat since November.
Rosengren said low interest rates are not a barrier to further Fed action, and that more easing could help reduce the borrowing costs for types of debt other than Treasuries, including mortgages.
Paul Ashworth, chief U.S. economist for Capital Economics in Toronto, said further Fed stimulus may spur stocks by encouraging investors to seek higher-yielding assets.
“It’s not just about whether it’s going to drive Treasury yields lower, it’s about whether it can provide a boost to other riskier asset classes, including equities,” Ashworth said.
The central bank started Operation Twist in September to reduce longer-term interest rates without expanding its balance sheet. Under the program, the Fed sold $400 billion of Treasury securities with maturities of three years or less and used the proceeds to buy $400 billion of Treasuries with maturities of six years or more.
The Fed’s leadership will probably detail its outlook next week, with Vice Chairman Janet Yellen scheduled to speak on monetary policy in Boston on June 6 and Bernanke planning to testify before Congress on the economy on June 7.
The Fed has two options should it decide to take further action with its balance sheet, said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh. It could renew Operation Twist by selling more of its short-term debt and buying more longer-term securities, or it could buy more bonds in a third round of quantitative easing.
Rosengren said in a Bloomberg News interview that he supports the option of extending Operation Twist at the Fed’s June meeting. Another round of quantitative easing would be an option if the Fed wanted to do something “more substantial,” he said.
“If you were looking for something that would promote growth but didn’t have an impact on our balance sheet, then certainly extending the maturity extension program would be a viable way forward,” Rosengren said. Such a move “would be a positive step that would provide some additional support to the economy and hopefully promote somewhat more rapid growth overall.”
Signs of weakness in the U.S. economy, and the debt crisis in Europe, also have increased the odds the Fed will ease further, Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, said in a note.
“The loss of momentum in the domestic economy and the gathering global storm raise the likelihood of further policy easing at the next meeting,” he said.
The economy has not had two consecutive months of jobs growth under 100,000 since July and August of 2011, a period that prompted the Fed to begin Operation Twist.
“It’s close to a game-changing report,” said Capital Economics’ Ashworth. “We’re not quite at that level of desperation as last summer, but we’re getting pretty close, particularly when you think about the deterioration elsewhere in the world.”
To help reduce unemployment and spur the economy, the Fed cut its benchmark interest rate to near zero in December 2008 and purchased $2.3 trillion of securities in two rounds of large-scale asset purchases.
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