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KTVL CBS Channel 10 :: News - Top Stories - Fed: Economy is losing strength

Wednesday, August 1 2012, 04:06 PM CDT
Fed: Economy is losing strength
By Martin Crutsinger/AP Economics Writer

WASHINGTON (AP) — The Federal Reserve said Wednesday that the U.S. economy is losing strength and repeated a pledge to take further steps to boost growth if hiring remains weak.

The Fed took no new action after a two-day policy meeting. But it acknowledged in a statement released after the meeting that economic activity had slowed over the first half of the year, with job creation remaining sluggish and consumer spending tapering off somewhat.

The Fed reiterated its plan to hold short-term interest rates, now near zero, at very low levels until at least late 2014.

Market reaction to the Fed's announcement was muted. Stock indexes dipped shortly after the statement was released at 2:15 p.m., but then moved higher. In the last half hour of trading the Dow Jones industrial average was flat. The yield on the 10-year Treasury note increased from 1.50 percent to 1.53 percent.

The statement was slightly different than the one issued after the Fed's last meeting, June 19 and 20.

In addition to noting that the economy had "decelerated," the Fed's policymaking committee said it would "closely monitor incoming information" and "will provide additional accommodation as needed" to stimulate the economy and job creation. In the June statement the central bank said "the economy has been expanding moderately" and that it "is prepared to take further action as appropriate."

Many economists believe the Fed could launch another program of buying government bonds and mortgage-backed securities at its September meeting if the economy doesn't show improvement. The goal of the program, known as quantitative easing, would be to drive long-term rates, which are already at record lows, even lower.

The Fed's next move could depend on whether Europe's central bank, which meets Thursday, takes any action to stimulate growth among the 17 countries that use the euro.

The next big signal on the U.S. economy's health comes Friday, when the U.S. Labor Department reports on July hiring and unemployment trends.

Economists forecast that U.S. employers added 100,000 jobs in July. That would be slightly better than the 75,000 a month average from April through June but still below the healthy 226,000 average in the first three months of the year. The unemployment rate is expected to stay at 8.2 percent.

Economists will also be watching Chairman Ben Bernanke's words closely at an annual economic conference Aug. 30 through Sept. 1 in Jackson Hole, Wyo.

"The Fed took no action at this meeting but strongly hinted that there will be further easing action at the next meeting in September," said David Jones, chief economist at DMJ Advisors.

The statement was approved on an 11-1 vote. Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, dissented for a fifth time this year. He objected to the Fed including language in the statement about keeping short-term rates low until late 2014.

U.S. economic growth slowed to an annual rate of just 1.5 percent from April through June, down from a 2 percent rate in the first quarter.

Fed officials have signaled in speeches their concern about job growth and consumer spending. Bernanke told Congress two weeks ago that the Fed is prepared to take further action if unemployment stays high.

Worries have also intensified the U.S. economy will fall off a "fiscal cliff" at the end of the year. That's when tax increases and deep spending cuts will take effect unless Congress reaches a budget deal. A recession could follow, Bernanke has warned.

Economists also worry that the debt crisis in Europe could intensify. Borrowing costs are too high for many governments, including Spain and Italy, and growth is slowing across the region as the effects of budget-cutting take hold. Unemployment hit a record 11.2 percent in June for the 17 countries that use the euro currency.

The European Central Bank holds a policy meeting Thursday and expectations are rising that it could try to jolt the region's financial system through bond purchases or other measures. ECB President Mario Draghi said last week that he was ready to "do whatever it takes" to save the euro currency union.

"The Fed is waiting for more data and they're waiting for Europe," said Sharon Stark, chief market strategist at Sterne Agee, who emphasized the ECB's meeting this week.

The Fed has already completed two programs aimed at driving down interest rates to encourage more borrowing and spending. It bought more than $2 trillion in Treasurys and mortgage-backed securities, expanding its balance sheet above $2.8 trillion.

The Fed has been running a program since September in which it sells short-term Treasurys and buys longer-term Treasurys. The program, called Operation Twist, will run through the end of the year and shift $667 billion from short-term to longer-term Treasurys

Even if the Fed launched a third round of bond purchases, few think that further lowering long-term rates would provide much benefit to the U.S. economy. Most businesses and consumers who aren't borrowing now aren't likely to change their minds if rates slipped a bit more.

The yield on the benchmark 10-year Treasury note is already near its record low of 1.39 percent, which it touched last week. The national average rate for a new-car loan barely tops 3 percent. And the average on a 30-year fixed-rate mortgage fell below 3.5 percent last week for the first time on records dating back 60 years.

Some regional Fed bank presidents have expressed concern that expanding the Fed's balance sheet beyond its current record $2.9 trillion to try to lower rates more would heighten the risk of high inflation later.

For now, U.S. inflation is low. Core consumer prices, which exclude volatile food and energy costs, have risen just 2.2 percent over the past 12 months. That's near the Fed's 2 percent target for inflation.

Fed: Economy is losing strength

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___

Copyright 2014 The Associated Press.
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