Several on FOMC Said Easing May Be Needed on Faltering

The Federal Reserve signaled further monetary easing remains an option to protect the U.S. economy from the danger that lawmakers will fail to reach agreement on the budget or Europe’s debt woes worsen.

Several members of the Federal Open Market Committee said new actions could be necessary if the economy loses momentum or “downside risks to the forecast became great enough,” according to minutes of the Federal Open Market Committee’s April meeting released yesterday in Washington.
U.S. stocks declined yesterday as reports the European Central Bank will stop lending to some Greek banks overshadowed stronger-than-forecast data on U.S. housing and manufacturing. A focus on threats to the U.S. economy gives officials more scope to ease policy, said Michael Hanson, senior U.S. economist at Bank of America Corp. in New York.

“If you have very clear and potentially large downside risks, like the fiscal cliff and Europe’s debt crisis, you are going to have a little more of an easing bias in place,” said Hanson, who formerly worked in the Fed’s monetary affairs division.

The Standard & Poor’s 500 Index (SPX) fell 0.4 percent to 1,324.80, the lowest since February. Treasury notes erased losses, leaving the yield on the 10-year Treasury note little changed at 1.76 percent.

A fiscal tightening caused by a failure of U.S. lawmakers to agree on a budget could damage the economy even before cuts take effect as an unclear outcome prompts businesses to defer investment and hiring decisions, the minutes said.
Bernanke Warning

Fed Chairman Ben S. Bernanke warned a group of senators last week that the expiration of fiscal policies at the end of the year may push the U.S. into recession, according to lawmakers who attended the meeting.

Fed governor Elizabeth Duke told a gathering of Realtors May 15 that the combined impact of the changes could amount to about 4 percent of the country’s economy.

Programs scheduled to end include tax cuts enacted under President George W. Bush, a payroll-tax holiday and extended unemployment benefits. In addition, budget cuts are set to take effect in January of 2013 as part of a deal last year in Congress to raise the U.S. statutory borrowing limit.

Central bankers last month affirmed their plan to hold interest rates near zero at least through late 2014 as they sought to push down an unemployment rate that has stayed above 8 percent for more than three years.
Rate Guidance

Fed policy makers discussed the conditions for any change in the 2014 horizon for low rates. The minutes cited a lack of confidence in their forecasts as one reason to leave the guidance unchanged.

“Some members recalled that gains in employment strengthened in early 2010 and again in early 2011 only to diminish as those years progressed,” the minutes said. “Moreover, the uncertain effects of the unusually mild winter weather were cited as making it harder to discern the underlying trend in the economic data.”

St. Louis Fed President James Bullard told reporters yesterday that there is “good logic” to putting policy “on hold” for an indefinite period of time.

“Until we get a clear difference in the economic outlook” with an acceleration or slowdown, there is no need to change course, Bullard said in Louisville, Kentucky.

Yesterday’s minutes summarized a meeting before the Labor Department report on May 4 showed U.S. employers added 115,000 jobs in April, the least in six months. The unemployment rate fell to 8.1 percent, the lowest since January 2009, as people left the labor force.
Jobless Claims

More recent data has allayed concern the job market is cooling. First time claims for unemployment benefits declined to a one-month low of 367,000 in the period ended May 5, Labor Department data showed last week. The Labor Department may report today that claims fell by another 2,000 last week, according to a Bloomberg News survey of economists.

The Fed said at its April meeting that the central bank would continue its swap of $400 billion of short-term debt with long-term debt to lengthen the average maturity of its holdings and help lower the interest rate on Treasuries, a move dubbed Operation Twist. The Fed is scheduled to complete the program at the end of June.

The central bank said in forecasts released with its April statement that it expects unemployment to fall to 7.8 percent to 8.0 percent by the final three months of this year. Gross domestic product is likely to rise by 2.4 percent to 2.9 percent this year, according to the so-called central tendency estimates that exclude the highest and lowest forecasts.
Growth Cools

Economic growth slowed to a 2.2 percent annual rate in the first quarter of this year from 3 percent in the final three months of 2011.

A stabilization of housing, the industry at the heart of the financial crisis, may provide a boost to the economy.

Builders broke ground on more homes than anticipated in April, Commerce Department data showed yesterday. Housing starts rose 2.6 percent to a 717,000 annual rate. A Fed report yesterday showed industrial production rose 1.1 percent in in April, propelled by gains in auto manufacturing and utility use.