Tags: Fed | Stimulus | easing | Employment

Fed May Heed Rosengren’s Stimulus Call After Employment Report

Friday, 01 Jun 2012 03:45 PM

Federal Reserve policy makers this month will consider joining Boston Fed President Eric Rosengren’s call for renewed stimulus after a report showed unemployment rose to 8.2 percent in May, economists said.

Rosengren said the Fed should further its full-employment mandate and extend beyond June a program known as Operation Twist, which lengthens the average duration of bonds on its balance sheet.

He spoke before the Labor Department said the U.S. added 69,000 jobs in May, the lowest increase in a year and short of the median 150,000 gain forecast in a Bloomberg News survey of economists.

 

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

“The May report does significantly raise the odds of further easing from the Fed,” said Dean Maki, chief U.S. economist at Barclays Plc in New York and a former Fed economist. “There will be a case made at the June meeting for easing.”

By calling for new stimulus, Rosengren aligned with the view of Chicago Fed President Charles Evans. Any setback in the job market is also a chief concern of Chairman Ben S. Bernanke, who said in April the Fed may provide more accommodation should unemployment fail to make “sufficient progress towards its longer-run normal level.” Fed policy makers plan to meet June 19-20.

Today’s employment report “does change the game, certainly in terms of Operation Twist,” said John Silvia, chief economist at Wells Fargo & Co. in Charlotte, North Carolina. “Because the slowdown in the economy has been fairly rapid compared to what they expected, they’ll go ahead and extend Operation Twist.”

Stocks Slump

The yield on the 10-year Treasury fell to 1.46 percent as of 3:05 p.m. in New York, from 1.56 percent late Thursday, after falling to as low as 1.4387 percent. The Standard & Poor’s 500 Index fell 2.4 percent to 1,279.25.

The central bank started Operation Twist in September to reduce longer-term interest rates without expanding its balance sheet. Under the program, the Fed sold $400 billion of Treasury securities with maturities of three years or less and used the proceeds to buy $400 billion of Treasuries with maturities of six years or more.

The Fed’s leadership will probably detail its outlook next week, with Vice Chairman Janet Yellen scheduled to speak on monetary policy in Boston on June 6 and Bernanke planning to testify before Congress on the economy on June 7.

The Fed has two options should it decide to take further action with its balance sheet, said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh. It could renew Operation Twist by selling more of its short-term debt and buying more longer-term securities, or it could buy more bonds in a third round of quantitative easing.

‘More Substantial’

Rosengren said in a Bloomberg News interview that he would support the option of extending Operation Twist at the Fed’s June meeting. Another round of quantitative easing would be an option if the Fed wanted to do something “more substantial,” he said.

“If you were looking for something that would promote growth but didn’t have an impact on our balance sheet, then certainly extending the maturity extension program would be a viable way forward,” Rosengren said. Such a move “would be a positive step that would provide some additional support to the economy and hopefully promote somewhat more rapid growth overall.”

Signs of weakness in the U.S. economy, and debt crisis in Europe, also have increased the odds the Fed will ease further, Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, said in a note.

Loss of Momentum

“The loss of momentum in the domestic economy and the gathering global storm raise the likelihood of further policy easing at the next meeting,” he said.

The economy has not had two consecutive months of jobs growth under 100,000 since July and August of 2011, a period that prompted the Fed to begin Operation Twist.

“It’s close to a game-changing report,” said Paul Ashworth, chief economist for Capital Economics in Toronto. “We’re not quite at that level of desperation as last summer, but we’re getting pretty close, particularly when you think about the deterioration elsewhere in the world.”

To help reduce unemployment and spur the economy, the Fed cut its benchmark interest rate to near zero in December 2008 and purchased $2.3 trillion of securities in two rounds of large-scale asset purchases.

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

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