Federal Reserve Meets Under Economic Cloud

June 19, 2012
The bank is expected to lower U.S. growth projections for the year.

The Federal Reserve on Tuesday began another crunch policy meeting under the pall of subpar U.S. jobs growth and a European debt crisis that could slowly squeeze the life out of the global recovery.

The Fed's open market committee gathered in Washington to decide what, if anything, it can do to speed the rate of U.S. job growth and strengthen defenses against the fiscal Tsunami ravaging Europe.

Since the Fed's last meeting U.S. unemployment has ticked up to 8.2% and the picture in Europe, particularly Spain, has grown bleaker.

At the end of its meeting on Wednesday the bank is expected to lower U.S. growth projections for the year from 2.7%.

Bernanke Offers No Hints

But recent comments from central bank officials have offered mixed signals about what actions they might take.

Fed Chairman Ben Bernanke kept his cards close to his chest in his latest testimony to Congress.

"We have made no decisions," he said when asked about the possibility of more stimulus.

However, he added, "I wouldn't want to take anything off the table at this juncture."

Other members of the policy-setting committee hold and have expressed vastly different views on whether the Fed can do anything meaningful, allowing speculation about the outcome of the meeting to run riot.

No Unified Front

Minutes from the last open market committee meeting showed the depths of divisions.

Some participants reportedly became "more confident about the durability of the recovery" while "others thought it was premature" to read too much into what had been positive economic indicators.

"Predicting the FOMC [Federal Open Market Committee] decision this week to be a particularly tough call," said Stephen Stanley, an economist with Pierpont Securities.

Yet many of the bolder Wall Street analysts expect the Fed will ride to the rescue, raising the risk that the Fed could inadvertently spark panic by standing pat.

Societe Generale economist Michala Marcussen said the outcome is uncertain but the Fed could decide to spend $600 billion more on mortgage securities and U.S. bonds to try to jump start investment.

But would it work?

A Promise of More Tools

Although the Fed insists it has more so-called quantitative easing or QE tools at its disposal, some -- even within the bank -- wonder if they can offer much help for the 12.7 million Americans who are out of work.

Unemployment has been above 8% for over three years despite the Fed launching a battery of innovative stimulus measures that pushed the limits of central banking.

The bank has lowered interested rates to near zero, absorbed around $2 trillion worth of assets to buoy markets and tweaked bond holdings to lower long-term interest rates.

"We have long held the view that each new round of QE comes with diminishing returns. We nonetheless see the impact as positive if nothing else giving the reassurance of a pilot in the plane," said Marcussen.

Copyright Agence France-Presse, 2012

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