A new document released by the U.S. Federal Reserve on Wednesday showed that the central bank was still concerned with the pace of economic recovery and considered taking further monetary stimulus if necessary.
Top officials of the Fed said that they continued to anticipate a “moderate” recovery in economic activity through 2011, supported by accommodative monetary policy.
With risks now growing, Fed officials at their June 22-23 meeting saw the need to explore new options for bolstering the economy. That is a turnaround from earlier this year when they were moving to wind down crisis-era supports.
According to the Federal Open Market Committee (FOMC), the central bank’s policy making group which meet eight times a year to set interest rates, the Fed is considering whether to implement further policy stimulus if the outlook is to worsen appreciably.
Fed officials projected economic growth in 2010 would reach 3 to 3.5 percent, lower than in April when the Fed presented a relatively stronger forecast, saying the economy could grow between 3.2 percent and 3.7 percent this year.
The new document showed that Fed officials saw the “economic outlook had softened somewhat.”
Looking forward, the Fed expects the economy will grow 3.5 to 4.2 percent in 2011 and 3.5 to 4.5 percent in 2012.
The central bank also projected that the average unemployment rate in the fourth quarter of 2010 was 9.2 to 9.5 percent, slightly higher than its previous forecast of 9.1 to 9.5 percent.
Unemployment, currently at 9.5 percent in June, is a key concern of the Obama administration.
The Fed said that “household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.”
Fed Chairman Ben Bernanke noted that the difficulty to get credit for small businesses remained a key challenge at present. He called on banks to lend more to sound small businesses in order to help create more jobs.
On inflation issue, the Fed said that “prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has treaded lower.”
With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, “inflation is likely to be subdued for some time.”
In fact, the minutes of the meeting said that a few Fed officials were worried about the risk of deflation, citing a widespread and destabilizing fall in prices of goods, prices of homes and stocks, and a drop in wages. The country’s last serious bout with deflation was in the 1930s. Keeping interest rates at record lows would help combat any deflationary pressures.
Paul Krugman, a Nobel laureate and renowned economist, said the Fed was feckless on Monday. He urged the Fed to take more aggressive actions to boost the recovery so as to prevent the economy from sliding to another verge of falling.
To tackle the financial crisis and foster the recovery, the Fed has left a key bank lending rate at between zero and 0.25 percent since December 2008. That has kept rates on certain credit cards, home equity loans, some adjustable-rate mortgages and other consumer loans at their lowest point in decades.
As the economic outlook is getting worse than expected, economists predict the Fed will keep the key rate at record low well into next year and possibly into 2012.
At their latest meeting, the Fed officials also discussed considerations surrounding the possible reestablishment of dollar liquidity swap lines. Participants agreed that such arrangements could be helpful in limiting the strains in dollar funding markets and the adverse implications of recent developments for the U.S. economy.
