WASHINGTON Aug 8 The Federal Reserve is
considering renewed efforts to boost growth should the weak
U.S. economic recovery and high unemployment take a turn for
Even though employers added a surprisingly hefty 117,000
jobs in July and the jobless rate slipped a tenth of a
percentage point, no one argues the job market is robust.
Officials will remain vigilant for signs subpar growth is
entrenched or is at risk of petering out altogether.
The possibility that financial market strains from the
ongoing debt crisis in Europe and jitters following Standard &
Poor's downgrade of U.S. debt boost chances the Fed may
consider actions to buttress recovery.
The Fed has already mounted one of the most aggressive
central bank easy money campaigns in history: it cut interest
rates to near zero in December 2008 and has since bought $2.3
trillion in assets to provide an additional prod to economic
Yet officials maintain the Fed still has arrows in its
quiver -- should conditions warrant firing them.
WHAT COULD THE FED DO?
* It could return what appears to have been its most potent
conventional tool, another round of large-scale asset
* It could make a smaller move, such as deliberately
restocking its balance sheet to emphasize longer maturities,
pushing down longer-term interest rates.
* Cement commitments to low rates and easy money in ways
that might free up buying, building and hiring. One such
initiative might be to bolster its promise to maintain rates
low for an extended period; a second might be to promise to
keep its much-expanded balance sheet large for an extended
Most analysts believe a communications measure or
rebalancing of the Fed's portfolio is the most likely first
step and that more bond buying would only occur if conditions
* Setting explicit targets for inflation or price levels. A
firm inflation target would strengthen confidence that the Fed
won't let inflation get out of hand; a price level target would
give the Fed more leeway to spur growth while keeping inflation
* The Fed could lower the interest rate it pays banks on
excess reserves, forcing banks to lend the money to obtain
higher rates of return.
WHAT PREVENTS THE FED FROM ACTING?
* Inflation worries: after the Fed's $600 billion second
round of quantitative easing, or QE2 as it became known,
commodity and energy prices soared worldwide. The Fed was
blamed for fueling inflation although Chairman Ben Bernanke and
other economists argued rising demand around the world was the
principal cause of rising prices.
Even so, U.S. inflation is now near the Fed's preferred
level of 2 percent or a bit below, depending on the gauge. When
the Fed launched QE2, inflation was near record lows.
Bernanke has said that higher U.S. inflation is one
restraint on Fed willingness to ease policy.
* Political pressures: the Fed was savaged at home as well
as abroad for QE2. U.S. lawmakers took the Fed to task for
risking inflation and proposed narrowing its mandate to focus
only on price stability, not on growth.
While the cental bank has over the years established a
reputation for political independence, the risk of stoking
further anti-Fed sentiment on Capitol Hill could give
* Effectiveness questions: although a study by Fed
economists said large-scale asset programs lowered rates on
10-year Treasury bills by between .30 of a percentage point and
1 percentage point, impact is a subject of heated debate.
Detractors point to the continued struggles of the economy
-- which grew at less than a 1 percent annualized rate in the
first half of the year -- as signs of quantitative easing's
limitations. Supporters counter that without the bond buying,
things would have been worse.
* Policy fatigue: after Fed purchases of near $1.4 trillion
worth of mortgage-related debt and $900 billion of Treasury
securities, many wonder whether additional bond buying would
have diminished effect.
Furthermore, some Fed officials believe that despite
stumbles, the recovery is on track and that the Fed's next step
should be tightening, not further easing.
* Difficult exit: critics worry that when the recovery
begins to gain traction, the Fed will have difficulty shrinking
its balance sheet from its current $2.9 trillion size, let
alone a larger one. Failure to reverse easy money policies in
time could ignite inflation and plunge the economy into a fresh
Fed officials say they have the tools in place to tighten
monetary policy even with a bloated balance sheet. However the
reversal of quantitative easing on such a large scale has never
been undertaken before.
WHAT WOULD THE FED HOPE TO ACCOMPLISH WITH MORE STEPS?
* Quick response: although the Fed was criticized for being
slow to react initially to the financial meltdown that began in
mid-2007, Fed Chair Bernanke's track record reflects a
willingness to take bold steps quickly in response to
* Emphasize growth: even a smaller step such as a
commitment to maintaining a large balance sheet would signal to
markets that the Fed sees weak growth, and not rising
inflation, as the main risk to the recovery, but would do so
without the potentially controversial step of committing to
another sequence of bond buying.
* Encourage risk-taking: moving to longer maturities could
push down interest rates for longer-dated securities and push
investors to take on riskier assets, such as stocks.
* Lower interest rates: by weighting the Fed's portfolio to
longer-dated maturities, buying more bonds, the Fed would be
pushing down longer term rates even more, thus encouraging
borrowing and hopefully, spending, investing, and hiring.
(Reporting by Mark Felsenthal)