WRAPUP 1-Fed officials say ready to act if risks grow

FORT LAUDERDALE, Fla./BELLEVUE, Wash., June 6 Wed Jun 6, 2012 6:21pm EDT

FORT LAUDERDALE, Fla./BELLEVUE, Wash., June 6 (Reuters) - T wo influential Federal Reserve officials say they are prepared to take even more policy action to boost the erratic U.S. economic recovery, but neither want to pull the trigger now.

Atlanta Fed President Dennis Lockhart and John Williams, of the San Francisco Fed bank, pointed on Wednesday to Europe's brewing crisis as a main threat to the United States, where weak jobs growth has compounded expectations that the central bank will act.

"It is my sense that material risks to the outlook are gathering," Lockhart said in Fort Lauderdale, Florida. "Should it become clear that something resembling my baseline scenario of continued, though modest, growth is no longer realistic, further monetary actions to support the recovery will certainly need to be considered."

Williams, who like Lockhart has a vote when the U.S. central bank meets June 19-20 to decide on policy, said the Fed will likely fall short of both its maximum employment and its inflation objectives "for some time."

Speaking in Bellevue, Washington, he warned that Europe's debt crisis as well as tighter U.S. fiscal policies are "wild cards" for the domestic economy.

"For these reasons, it's crucial that we maintain our current highly stimulatory monetary policy stance," Williams said. "We must also stand ready to do even more if needed to best achieve our statutory goals of maximum employment and price stability."

While Williams lowered his expectations for GDP growth, Lockhart's comments revealed a change in tone from last month, when he appeared more keen to focus on tweaks to the Fed's communications strategy. Indeed, Lockhart told reporters his level of concern had risen since the Fed's April meeting.

Still, taken alongside a raft of comments by other top Fed officials in the last few days, a consensus has yet to emerge on the need for further stimulus.

Michael Feroli, chief U.S. economist at JPMorgan, called the comments by Lockhart and Williams "dovish, but not decisive," in a note to clients.

The pair "were more open-minded about providing additional stimulus relative to their last talks. At the same time neither indicated that they had made up their minds that the economy needs further Fed action," Feroli wrote.

EYES ON JUNE MEETING

On Wednesday, the European Central Bank left interest rates steady at 1 percent, despite concerns about a Greek exit from the euro and about Spain's banking troubles. Greece is approaching a key election on June 17.

If the Fed decides that it needs to act later this month, it could either extend its current program of selling short-term securities to buy longer-dated ones, known as Operation Twist, or it could embark on a third round of asset purchases, so-called quantitative easing (QE).

Fed Chairman Ben Bernanke will testify before Congress on Thursday, and analysts will be listening closely for any hints that more bond buys are in store.

Job growth in May fell well below expectations while the unemployment rate rose for the first time in nearly a year, to 8.2 percent from 8.1 percent in April. It was the third straight disappointing month of jobs growth, while U.S. GDP growth also was revised down to 1.9 percent from 2.2 percent, raising fears that the expansion might peter out.

Citing that jobs report, Williams said, "It's important not to get carried away by one month's data." Still, he called the unemployment rate "far too high," and added QE3 is his preferred easing tool, if need be.

The Fed in late 2008 slashed interest rates to near zero and has since bought $2.3 trillion in long-term securities - QE1 and QE2 - in an unprecedented drive to spur growth and revive the economy after the worst recession in decades.

Even so, the recovery has been slow and economic growth has been erratic, leading the central bank to say it expects to keep rates "exceptionally low" at least through late 2014.

A raft of figures has shown signs of economic weakness around the world, with large emerging economies like China, India and Brazil also facing significant hurdles. Lockhart said this presents yet another risk to U.S. economic prospects.

"A growth slowdown in emerging economies would aggravate the effects of the European slowdown by further limiting the role of exports in the U.S. recovery," he said.

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