Fed officials fear new economic downturn

The Federal Reserve building in Washington, DC. (Credit: Brendan Hoffman/Getty Images, file)

(AP) WASHINGTON - The Federal Reserve is open toward taking further action to support the struggling U.S. economy. But minutes of the Fed's June meeting show policymakers are at odds over whether the economy needs more help now.

A few said the economy may already require additional support. But several others noted that further action "could be warranted" if the recovery lost momentum, if risks became more pronounced or inflation seemed likely to run below the committee's target.

Investors appeared to be disappointed by the division within the Fed.

QE3 to set sail in August?
Fitch backs U.S. at "AAA" credit rating
Global stocks mixed, outlook for earnings dim

Stock prices sank after the Fed expressed concerns about the economy. The Dow Jones industrial average had been down nearly 40 points before the minutes were released at 2 p.m. Eastern time. At around 2:30 p.m., the Dow was down 112 points, on track for its fifth straight day of losses.

Fed officials signaled at the June 19-20 meeting their concern that the struggling U.S. economy could worsen if Congress fails to avert tax hikes and across-the-board spending cuts that kick in at the end of the year. And they expressed worries that Europe's debt crisis will weigh on U.S. growth.

More stimulus "won't become a reality unless the recovery loses even more momentum or a more severe flare up in the euro-zone crisis raises the already elevated downside risks," said Paul Ashworth, chief U.S. economist at Capital Economics.

Members said the economy will likely continue to grow moderately. But the Fed lowered its growth forecast at the June meeting, noting that the U.S. job market had weakened and consumer spending slowed. It also said it didn't expect the unemployment rate to fall much further this year from its current 8.2 percent.

Since the Fed met last month, the job market's weakness has persisted. The government said Friday that hiring in June was weak for a third straight month. The economy added just 80,000 jobs last month.

Some members noted that defense contractors are already laying plans for layoffs if lawmakers don't address the package of tax hikes and spending cuts by the end of the year. Members warned that tighter government spending could slow the economy well into next year.

At the meeting, the Fed extended a program that shifts its bond portfolio to try to lower long-term interest rates. Policymakers left open the possibility of providing further help, such as launching a new program of bond purchases.

Chairman Ben Bernanke may offer further guidance on the Fed's plans next week when he delivers the central bank's updated economic assessment to Congress. After the June meeting, Bernanke told reporters he was open to another round of bond purchases if the job market didn't improve.

Employers added an average of just 75,000 jobs a month in the April-June quarter - only about a third of the 225,000 jobs a month created in the first three months of the year.

Many economists predict the Fed will hold off for one more meeting and give the job market a little longer to show improvement. If it doesn't show gains, the Fed could announce some new action at its Sept. 12-13 meeting.

Since the recession, the Fed has bought more than $2 trillion in Treasury bonds and mortgage-backed securities, expanding its portfolio to more than $2.8 trillion.

After its last meeting, the Fed downgraded its economic outlook. It now expects growth of just 1.9 percent to 2.4 percent in 2012, half a percentage point lower than its April forecast.

[smittyc]

With the Eurozone having 5 of the 17 nations in bankruptcy and 4 more headed in that direction currently we should all be concerned. The Zone also has healthcare which is in pretty rough shape, other than "emergencies" weeks and months go by before approvals are received for non life threatening healthcare. Those Americans that travel to the zone all pay 16% on all purchases made which is applied to the zones healthcare, something they might not know but is a good yardstick of what healthcare will cost us here. 16% of disposable income is a lot of money and is why I have stated hlthcare is going to be hard on the middle class and people at the bottom as well.

[ugacrew]

As much as we have studied history, we have yet to learn even from our observation of third world countries, that the rich inevitably fall when they insist on a gross and inevitable distribution of its nations resources among its citizens.

[ugacrew]

Blame neither President, past or present. America is on track for it own downfall. The scriptures teach us that a nation divided against itself cannot stand. America has persisted in its divided state but presently even more so.

[davidd5063]

Dear lord the GOP trolls are out early today. The ONLY way out and back to the turn-around of the first two years of the Obama administration is to get rid of the GOP filth that is obstructing progress. Things were improving, but they said not fast enough in 2010 so elect us and we'll speed it up. Well they didn't speed it up, they STOPPED it with obstructionism and still can't seem to remember that they SHARE THE RESPONSIBILITY FOR THE PAST TWO YEARS!

[RealWorldNow]

Harry Reid hasn't passed a budget in over three years, he has a stack of bills 35 high that he won't bring to a vote and you say the GOP is obstructing? Really ? Whenever you read about the fed meetings one topic always is mentioned as a top priority to avert financial disaster, "cut spending" ! How are we going to get a grip on spending when Harry doesn't even want a roadmap? No budget, no hope ! He just likes the locked in spending that the dems put in place over three years ago, that's why we have had three year of a record deficit spending!

[Lerianis6]

You have to get the various businesses in America spending. The only way to do that is to put higher taxes on 'windfall profits' so that we encourage them to spend their profits and not sock them away in a locked box where it does the economy no good.

[marychgo]

The Fed can't get the economy growing faster by itself; it needs help from Congress. The Fed's monetary tools have limited effect; we need fiscal stimulus. But it seems as if EVERY Republican in Congress is willing to prolong the pain of the American people if their obstructionism will make the President look bad and improve Mitt Romney's chance of winning in November. When did putting your own (or your party's) interest ahead of the interests of the American people stop being called treason?

[Lerianis6]

Bottom line, that is true. The Rethuglicans are trying to keep America in a bad state in order to get their boy into the White House. I call that what it is... TREASON!

[RealWorldNow]

You can't spend your way out of this, Europe tried it can't you see what is happening to them right now?

[Jaylah54200]

I have a difficult time imagining that the unemployment numbers are going to improve significantly between now and next month.

Job numbers tend to go up during spring and summer when construction season starts and seasonal agricultural hiring is at its peak.

[askagain]

Apparently the answer is four more years of Obama. Don't expect much improvement.

[Molly-Pchr]

Political hacks. The IMF says there is a recovery, albeit slow, and that budget cuts set for the end of the year could cause a stall and that the debt ceiling should be raised. My money's on the IMF.

[rightofwrong]

Raise taxes and force those evil rich folks and their businesses out of the country. The last thing we need here is business growth. President Obama is looking out for the little guy. He will give us green jobs when we need them and support us when we don't like what's offered. We will have free TVs and internet. Everybody gets an electric car and a house with solar panels. We get free healthcare and haircuts. The planets will align and global warming will end. 4 More Years! 4 More Years! 4 More Years! *snark

[davidd5063]

No REAL American ever moved their business out of their home county, much less the country. Go back to watching Rush you bigotted piece of garbage.