Fed may consider additional stimulus

By Craig Torres, Jeannine Aversa, and Josh Zumbrun
Bloomberg News / August 3, 2011

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WASHINGTON - Federal Reserve policy makers may start weighing additional steps to prop up the recovery after growth fell below 1 percent in the first half of this year and economists began cutting second-half growth forecasts.

“At a minimum, the FOMC will have a serious debate about the policy options - what they should do, and what they expect to get from it,’’ said Roberto Perli, a former associate director in the Fed’s Division of Monetary Affairs, referring to the Federal Open Market Committee. “Growth in the first half was dangerously close to zero,’’ said Perli.

The FOMC will meet Tuesday after the government marked down its measure of economic growth to annual rates of 0.4 percent in the first quarter and 1.3 percent in the second, casting doubt on the Fed’s June outlook of 2.7 percent to 2.9 percent growth for this year.

Chairman Ben Bernanke said in congressional testimony in July that the Fed may take new action if the economy stalls, including beginning a third round of bond purchases. The central bank could also cut the interest rate it pays banks on excess reserves and pledge to hold its assets at a record high and interest rates at record lows for a longer period, he said.

Any effort by Bernanke to expand the Fed’s $2.87 trillion balance sheet would probably meet resistance from district Fed presidents, including Philadelphia’s Charles Plosser, who have said bond purchases and low borrowing costs have already pushed up long-term inflation risks too high.

During the first half of 2011, so-called core inflation rose while growth of gross domestic product slowed, even as the Fed carried out a $600 billion program in asset purchases known as quantitative easing.

The Fed’s preferred inflation benchmark, the personal consumption expenditures price index minus food and energy, rose at a 2.2 percent annual rate for the three months ending May, up from 0.7 percent pace for the three months ending in January.

“Given current inflation trends, additional monetary stimulus at this juncture seems likely to raise inflation to undesirably high levels and do little to spur real growth,’’ Richmond Fed president Jeffrey Lacker said in a speech last week. He is a voting member of the FOMC next year.

Dean Maki, chief US economist at Barclays Capital Inc., cut his projections for growth by a full percentage point for the current quarter and subsequent five. He expects GDP to expand 2 percent from July through September.