Fed officials open to more efforts to stimulate economy if recovery worsens

Several members of the Federal Reserve’s policymaking committee said they would consider expanding efforts to stimulate the U.S. economy if threats to the recovery worsen, according to minutes of the panel’s April meeting.

Officials cited several factors, including tax increases and spending cuts set to take effect in January that could limit the economic recovery, according to records of their discussion released Wednesday.

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The “possibility of a sharp fiscal tightening” was seen as “a sizable risk,” the minutes say.

Fed officials also said Europe’s financial problems pose a significant threat to the economy — and that was before the latest concerns about political and financial disarray in Greece.

The Fed last month affirmed its intention to keep a key interest rate “at exceptionally low levels” through late 2014. It has undertaken two major rounds of bond purchases to inject money into the economy but has resisted a third round. The minutes suggested such an action could be back on the table if the recovery loses momentum or the economic outlook turns dark enough.

Fed policymakers were focused largely on what Fed Chairman Ben S. Bernanke has called a “fiscal cliff” looming in 2013, when big changes are scheduled to hit an array of tax and spending policies. Tax cuts that date to the George W. Bush administration, benefiting virtually every American household, are set to expire, as is a temporary payroll tax holiday championed by President Obama.

Meanwhile, sharp cuts are set to strike the Pentagon and domestic programs as a result of a deal Obama struck with Congress last year to break an impasse over the federal debt limit. All told, some analysts say the policy changes could amount to as much as 5 percent of the gross domestic product.

Lawmakers have until New Year’s Eve to defuse the budget bomb by agreeing on an alternative deficit-reduction policy. Barring such a compromise, the Fed minutes say, the “sharp fiscal tightening” could occur at the beginning of next year — after the November election but before a new Congress, and perhaps a new president, take office.

Several top Fed officials expressed concern that, in the meantime, “uncertainty about the trajectory of future fiscal policy could lead businesses to defer hiring and investment.”

Economist Allen Sinai, chief executive of the firm Decision Economics, said Wednesday that the Fed was sending a message about a situation that is beyond its control.

“In its opinion, the economy is subject to a huge risk in terms of how it does next year if the fiscal cliff happens and Washington doesn’t deal with it in advance,” Sinai said.

If the problem appears politically in­trac­table at the end of this summer or even sooner, Sinai said, “I can almost guarantee you our stock market will have a major sell-off.”

Officials participating in the April meeting of the Fed’s key monetary policy group, the Federal Open Market Committee, “expected that the government sector would be a drag on economic growth over coming quarters,” the minutes say.

As some officials see it, there are limits to what more the Fed can do if the economy worsens, because the Fed is already trying to hold a key rate near zero, the minutes say.

Low interest rates may already be creating other problems, Fed officials said.

“A few participants indicated that they were seeing signs that very low interest rates might be inducing some investors to take on imprudent risks in the search for higher nominal returns,” the minutes said.

Overall, Fed officials expected economic growth to “remain moderate over coming quarters and then pick up gradually,” the minutes say.

Exports have been supporting U.S. growth, but further trouble in Europe or a greater slowdown in China could undermine those sales, the minutes say.

Analyzing unemployment, Fed officials were trying to determine how much is temporary or cyclical and how much reflects a structural shift, the minutes show.

The unemployment rate has declined partly because people have withdrawn from the workforce, the minutes note. Frustrated in their efforts to find jobs, some people stop looking.

Fed officials “expressed a range of views” on the extent to which structural issues are involved — for example, unemployed people lacking the skills that employers need.

Then there’s the housing market, which has been a chronic damper.

Most participants in the Fed’s April meeting “anticipated that the housing sector was likely to recover only slowly over time,” the minutes say.

 
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