Fed takes spotlight as recession fears loom (AP)
WASHINGTON - When it meets Tuesday, the Federal Reserve could signal what it can or will do to help the nation avoid another recession.
Since the Fed last met in June, Standard & Poor’s has downgraded long-term U.S. debt, stock markets have plunged, Europe has struggled to contain its debt crisis and a range of indicators have shown the U.S. economy struggling to grow.
Some economists say the Fed might offer a clearer indication of how long it intends to keep long-term interest rates at record lows. More explicit language on interest-rate policy might boost investors’ confidence at a dangerous moment for the global economy. But economists don’t expect the Fed to hint at another round of Treasury bond purchases.
Earlier this summer, the Fed ended a $600 billion Treasury bond-buying program. The bond purchases were intended to keep rates low to encourage spending and borrowing and lift stock prices.
Fed Chairman Ben Bernanke isn’t scheduled to speak after Tuesday’s meeting. Bernanke this year made a historic change by scheduling news conferences after four of the Fed’s eight policy meetings each year, but Tuesday’s isn’t one of them. The Fed’s opportunity to calm the markets will come in the statement it will issue after the meeting.
Later this month at the Fed’s annual retreat in Jackson Hole, Wyo., Bernanke will likely address the weakening economy, the S&P downgrade and the market turmoil.
In July, Bernanke told Congress that the Fed is ready to act if the economy slowed. He said the Fed could launch another round of bond purchases to stimulate growth. But he made clear the Fed had no plans for such a step. He also said the Fed could provide “more explicit guidance” about how long it planned to keep its key short-term rate at a record low near zero.
“We have to keep all the options on the table; we don’t know where the economy is going to go,” Bernanke said.
In the weeks since Bernanke spoke to Congress, a batch of data has sketched a dimmer outlook for the economy. It grew at an annual rate of just 0.8 percent through the first six months of the year. In June, for the first time in 20 months, consumers cut spending. Manufacturers are barely growing. Service companies grew by the smallest amount in 17 months.
The Dow Jones industrial average has lost nearly 15 percent of its value since July 21, tumbling more than 1,600 points in that time.
Joel Naroff, chief economist at Naroff Economic Advisors, said the Fed might use its statement to signal that it’s prepared to keep rates low longer than had been expected. Many economists agree that would signal no rate change in 2012.
Since March 2009, the Fed has said only that it plans to keep the rate at “exceptionally low” levels for an “extended period.” Many economists expect the Fed on Tuesday will spell out what “extended period” means.
Some analysts say the economy would have to worsen significantly for Fed policymakers to agree on more bond purchases. A few Fed members oppose another round of purchases, saying it could spark inflation by flooding the financial markets with too many dollars.
Bernanke in his July testimony said the Fed would consider more stimulus only if the economy weakened further and the threat of deflation returned. Deflation is a prolonged period of falling prices which the United States hasn’t seen since the Great Depression.
Fed officials were worried about deflation and weak growth last summer when Bernanke first raised the prospect of a second round of bond buying.
“There will be a high hurdle for considering a third round of bond buying,” said David Jones, chief economist at DMJ Advisors, a Denver economic consulting firm. “Fed officials who opposed the second round will argue that the Fed has done all it can to help the economy and anything more will risk higher inflation down the road.”
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