Federal Reserve officials must choose this week between their best estimates and their worst fears of what will happen to the U.S. economy.
Policy makers will bring new forecasts to their June 19-20 meeting and probably will mark down their April central-tendency estimate for growth of 2.4% to 2.9% this year. Lurking in the background is the risk of increasing financial stress in Europe and stubbornly high U.S. unemployment that has remained above 8% for 40 consecutive months.
All this could prompt them to move away from their outlook for moderate growth and tilt toward a "risk-management" strategy pioneered by former Fed Chairman Alan Greenspan, which puts more emphasis on tracking and containing high-cost threats. Both Janet Yellen, the Fed’s vice chairman, and William C. Dudley, head of the Federal Reserve Bank of New York, used the phrase in the past month.
That insurance may come in the form of extending Operation Twist -- which JPMorgan Chase & Co. and Jefferies & Co. predict -- or an even more aggressive response if Fed officials see high costs in a slowdown of U.S. growth. The $400-billion U.S. program, which was announced in September and ends this month, involves selling short-term debt and buying longer-term bonds.
The Fed has about $190 billion U.S. of short-term maturities left to continue Operation Twist for another three months, based on calculations by Nomura Securities International Inc. The firm’s forecast is for no extension at the June meeting, with both Chairman Ben Bernanke and the Federal Open Market Committee probably indicating they could take additional easing steps, such as outright bond purchases, if economic circumstances warrant.
An extension would fit a forecast that says the U.S. economy will avoid a disaster scenario of rising unemployment and rapidly decelerating inflation. The Fed’s decision June 20 at 12:30 p.m. New York time could be more aggressive than investors expect if policy makers decide their confidence in their own forecasts is low and want to do something extra to lean against a worst-case scenario
Some of the weakness in labor markets could be explained by unseasonably warm weather that boosted hiring earlier this year. Operation Twist has helped increase housing activity, with sales of new and existing homes rising to a 4.96 million seasonally adjusted annual rate in April from 4.51 million a year earlier, based on Bloomberg calculations.
Service industries, which account for about 90% of the economy, grew in May, according to the Institute for Supply Management’s index of non-manufacturing businesses.
