Federal Reserve could enact $1 trillion "rescue" as soon as next week.
A report U.S. companies hired fewer workers than forecast last month intensified a debate among economists over whether Federal Reserve policy makers will take an incremental step next week toward providing more stimulus.
U.S. central bankers said in June that more monetary stimulus "might become appropriate" if the economic outlook "were to worsen appreciably." Chairman Ben S. Bernanke said last month the Fed may at some point maintain stimulus by investing the proceeds from maturing bonds into U.S. Treasuries.
"I lean toward a result where the Fed talks about reinvesting mortgage-backed securities runoff at next week's meeting but decides to wait six weeks and see what the economic data bring," said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. "The economic recovery downshifted in May but activity is absolutely not hurtling toward a double dip."
Government figures showed today that private payrolls increased by 71,000 jobs last month, less than the 90,000 economists had forecast. While the data may not alone force the Fed's hand, other indicators including a slump in housing point to a slowing recovery and greater odds policy makers will move toward more easing at an Aug. 10 meeting, some economists said.
Retailers in the U.S. reported July sales gains that missed analysts' estimates as consumers reduced spending before the back-to-school season. A manufacturing gauge tracked by the Institute for Supply Management fell, while a similar index tracking service industries rose.
"The labor report increases the chance that they make the decision to reinvest the proceeds of maturing mortgage-backed securities in short-term U.S. Treasuries at this meeting," said Ward McCarthy, chief financial economist at Jefferies & Co. Inc. in New York. "They were heading in that direction anyway."
Bernanke outlined three options for additional ease in response last month to questions from Senator Richard Shelby, an Alabama Republican. The Fed chairman said in semi-annual testimony to Congress that the central bank could strengthen its commitment to keep interest rates low, or lower the rate it pays on bank reserves.
"The third class of things, though, has to do with changes in our balance sheet, and that would involve either not letting securities runoff as they are currently running off, or even making additional purchases," Bernanke said.
The Standard and Poor's 500 Stock Index fell 0.8 percent to 1,116.71 at 2:53 p.m. in New York. Yields on U.S. 2-year notes fell below 0.5 percent for the first time as Treasuries rallied.
"It's a slow drip of quantitative easing medicine rather than a big shot," said Robert Dye, senior economist at PNC Financial Services Group Inc. in Pittsburgh. "That’s going to be a mostly symbolic move telling the public that the Fed remains watchful."
Policy makers will probably "return to unconventional monetary easing by" late this year or early in 2011, Jan Hatzius, chief U.S. economist for Goldman Sachs Group Inc. in New York, said in a note to clients. Such steps may include "a more iron-clad commitment to low short-term policy rates" and more purchases of assets, probably Treasuries.
The Fed would purchase at least $1 trillion in additional assets, he said.
With 30-year mortgage rates trending around 4.5 percent to 4.75 percent, the Fed will have about $275 billion of its $1.1 trillion portfolio of mortgage-backed securities pay off over the course of this year, according to estimates by Barclays Capital Inc. That leaves about $23 billion a month for reinvestment if Fed officials choose that option.
Joseph Abate, Barclays' money market strategist in New York, said if the Fed chose to reinvest, that would signify they have a target for the level of excess bank reserves, currently at $1 trillion.
"Is the Fed trying to target a specific level of bank reserves?" he said. "I don’t think they are."
Barclays' economists don't expect the Fed to take more monetary policy steps at next week's meeting and for the remainder of 2010.
The Fed may communicate next week more attentiveness to downside risks to growth, said Laurence Meyer, senior managing director of Macroeconomic Advisers LLC and a former Fed governor. "We expect the committee to offer a more pessimistic assessment of the outlook in its statement," he said.
Meyer also said he hopes the Federal Open Market Committee will give consideration to the "risk management" strategy employed during the last deflation scare.
"The risk management approach calls for an easier policy today," Meyer said. "It is better to err on the side of being too easy when the risks to growth are decidedly to the downside and the costs of slower growth are high and the risks of higher inflation are low."
Still, Meyer said that, given the absence of any focus on the risk management approach so far, the threshold for taking action at the August meeting is high.
"It is a big deal to take a step toward easing after you have spent a year talking about the exit strategy," he said.