Fed: Softer Recovery May Need Further ‘Policy Stimulus’

Monetary policyA “softer” economic recovery prompted Federal Reserve officials to discuss the possibility of “further policy stimulus” at last month’s monetary policy meeting, according to minutes released by the Fed today.
Fed officials raised such a scenario as a result of persistent unemployment, modest income growth, tight credit and a housing market regressing after the expiration of homebuyer tax credits.
After the June 22-23 Federal Open Market Committee meeting, Fed officials maintained the historically low funds rate of 0-.25 percent as inflation was deemed quite low for the near term.
“However, members noted that in addition to continuing to develop and test instruments to exit from the period of unusually accommodative monetary policy, the Committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably,” the Fed minutes said.
The Fed sentiment virtually eliminates fears of rising interest rates by the end of this year as anticipated in recent weeks – before more recent housing and consumer spending data fell below expectations.
Fed officials reduced forecasts for growth this year to a range of 3 to 3.5 percent – from the 3.2 to 3.7 percent projected in May.
The 10-member FOMC concluded that the outlook for inflation over the next couple of years was revised down modestly.
But continued labor market weakness could “weigh on consumer sentiment, and households were still repairing their balance sheets; both factors could restrain consumer spending going forward,” the minutes said.
Since the expiration of homebuyer tax credits on April 30, housing market data has suggested that home sales and starts could remain weak in the near term.
The housing outlook is aggravated by lower demand and a continuing supply of foreclosed houses coming to market, Fed officials said.
“Participants judged that house prices were likely to remain flat or decline somewhat further in the near term,” the minutes said.
See the June 22-23 FOMC meeting minutes.