Officials warn of looming crisis for economy

AP Economics Writer

(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.

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.

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7 thoughts on “Officials warn of looming crisis for economy

  1. Jimmy Carter has slept well this last 3.5 years. He goes to bed and wakes up knowing he is not the worst President!!!

  2. Until policies are drastically changed to accommodate the production of quality goods and services for export, at competitive prices, the economy will not only take on more rust, but will completely corrode. Further, trade deficits and deficit spending for decades on end ultimately leads to decadence. Public spending where nearly 50% is borrowed borders on insanity.
    The downside of unfunded obligations by various public agencies is now surfacing in Scranton Pennsylvania and other cities.

    Ho Hum!

  3. So how about if everyone talked that we were not really in an unfolding exponentially growing debt situation, would that also magically become a self fulfilling prophecy? Sometimes reality is just that. Reality is the debt burden is so far out of control to never be paid back, ever. It was game over when yearly debt exceeded GDP, and that's been going on for years now. Being a zombie walking around in denial does not make it all go away unfortunately.

  4. Face facts, Days of wine and roses is over: the money is spent, the credit cards are maxed. Like the old Ray Charles song goes---- " Busted"

  5. I worried that, with so many people talking doom, that it will be self-fulfiiling prophecy. After all, emotional currents do influence the market.

    1. My hope is that with the news so negative and everyone bearish, the surprise move will be up. I'm trying to hedge my bets both ways, but I still think the market will surprise (barring a complete meltdown in Europe).

    2. Exactly, I'm with you on that, but the fact that no one wants to cry "Depression" on his watch cannot be ignored. The economy is not healing, it's just getting sicker.

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