Tags: Fed | Action | Recovery | Doubts

WSJ: Split Fed to Consider More Action Amid New Recovery Doubts

Wednesday, 06 Jun 2012 11:41 AM

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The Federal Reserve will hold a scheduled monetary policy meeting on June 19 and 20 and two camps will emerge to debate stimulating the economy via monetary easing tools.

Since the downturn, the Fed has twice juiced the economy via two rounds of quantitative easing (QE1 and QE2) by buying mortgage-backed securities and Treasurys held by banks, pumping the economy with $2.3 trillion in expansionary liquidity in the process.

Quantitative easing aims to spur growth by pushing down long-term interest rates to encourage investment and hiring, and is seen as an expansionary monetary policy tool when interest-rate cuts alone don't work.

Editor's Note: You Deserve to Know What Obama and Bernanke Are Hiding From Americans

A deteriorating European debt crisis is threatening global growth, while the U.S. recovery appears to be slowing as evidenced by downwardly revised first-quarter gross domestic product rates and dismal jobs reports.

One Fed camp appears to be willing to roll out a third round of stimulus, known as QE3, or at least some sort of accommodative policy to spur growth.

"We should be providing more accommodation," Charles Evans, president of the Chicago Fed, said in a speech Tuesday evening, according to The Wall Street Journal.

Others are taking more hawkish stances, warning against stimulus on the grounds it may plant the seeds for inflation down the road and won't do much good anyway.

"During the next few weeks as I contemplate the future course of monetary policy, I will be asking myself what good would it do to buy more mortgage-backed securities or more Treasurys when we have so much money sitting on the sidelines," Richard Fisher, president of the Dallas Fed, said in a speech Tuesday at St. Andrews University in Scotland, the Journal adds.

"I believe that were we to go down the path to further accommodation at this juncture, we would not simply be pushing on a string but would be viewed as an accomplice to the mischief that has become synonymous with Washington."

Meanwhile, cloudiness makes coming to consensus all the more difficult.

"There is little worry at the Fed of a new recession. But central-bank policy makers might act if their growth forecasts decline enough to raise doubts about the economy's capacity to keep lowering unemployment," the Journal writes in an analysis.

In May, the economy added a net 69,000 nonfarm payrolls, well below expectations for around 150,000 jobs.

May's numbers were well below January and February's respective totals of 275,000 and 259,000.

In the first quarter of 2012, the U.S. gross domestic product grew 1.9 percent, down from a preliminary estimate of 2.2 percent.

"The employment data are hard to read now. Some of the recent slowdown in job gains might be a temporary payback after a hiring spurt in January and February partially related to warm weather," the Journal adds.

"Fed officials also worry that data might be skewed by seasonal adjustments that statisticians use to smooth normal monthly swings in the data. These adjustments are based on past movements in the economy and might have been thrown off by large swings during the financial crisis."

Other Fed policymakers continue to voice their opinions in public, pointing out that if the economy worsens, then the Fed should act.

"It is my sense that material risks to the outlook are gathering," Atlanta Fed President Dennis Lockhart told business executives at The Broward Workshop in Fort Lauderdale, Fla., according to Reuters

"Should it become clear that something resembling my baseline scenario of continued, though modest, growth is no longer realistic, further monetary actions to support the recovery will certainly need to be considered."

Editor's Note: You Deserve to Know What Obama and Bernanke Are Hiding From Americans




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