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Fed policymakers hold off on stimulus

By Don Lee, Tribune Washington Bureau –

WASHINGTON — Federal Reserve officials are holding off on launching more economic stimulus for now, but gave a strong signal that they would take action if the nation’s jobs data get worse.

Despite mounting speculation on Wall Street and political pressure in the face of faltering economic and job growth, Fed policymakers announced no new action at the conclusion of their two-day meeting Wednesday.

Instead, they gave a slightly more downbeat assessment of the economy than they did in June but noted that the housing market remains depressed. And they repeated their earlier pledge to keep short-term interest rates near zero at least through late 2014. Some analysts were expecting the pledge to be extended through 2015.

The inaction sent stock prices only slightly lower as the U.S. central bank signaled a stronger willingness to launch new measures to pump up the economy. Investors were also hopeful that the Fed’s counterpart in Europe would take action Thursday to help ease the continent’s debt crisis.

Chairman Ben S. Bernanke and his colleagues said they “will provide additional accommodation as needed” to support the economic recovery. In June, the Fed simply said it was “prepared to take further action.”

Some analysts and politicians took the change in wording to mean that the Fed was close to launching another round of massive bond-buying or other efforts to spur investment and growth.

“If you read between the lines of the Fed’s statement, it’s safe to expect that new action is coming soon. It’s just a matter of when,” said Sen. Charles E. Schumer, D-N.Y., a member of the banking committee who, along with some other Democrats, has exhorted Bernanke to provide more stimulus.

Republican lawmakers, on the other hand, have pressed Bernanke to show restraint. Their concerns, shared by some Fed officials, are that further monetary easing could trigger inflation down the road.

The Fed statement Wednesday suggested that officials weren’t worried about inflation but wanted to see more economic data, especially the next two monthly jobs reports, before doing more. The July employment report will be issued Friday. Most analysts are expecting slightly better but still weak hiring numbers.

Job growth has slowed sharply since early this year, and the jobless rate has been stuck above 8 percent. Economic growth dropped to a paltry 1.5 percent annual rate in the second quarter, a pace too slow to bring down unemployment.

The Fed’s statement acknowledged as much.

But analysts said Bernanke wasn’t likely to push for more action so quickly, considering that in June policymakers extended through year’s end a program to swap short-term bonds for longer-term ones. The program, known as Operation Twist, is aimed at holding down long-term interest rates, and Bernanke has called it “substantive.”

What’s more, Bernanke has questioned the potential benefits of more stimulus such as another round of bond buying. Two previous rounds of bond purchases helped spur investment and economic activity, but long-term interest rates already are down to historically low levels.

The statement Wednesday “reinforced the message from Bernanke that Fed policy is not a panacea,” said Alan Levenson, chief economist at mutual fund giant T. Rowe Price in Baltimore.

Levenson said he was a little more inclined after Wednesday to think that the Fed would initiate another bond-buying effort this year, but he noted that “they’re not just responding to where the economy has been, but where it’s going.”

One key factor in whether the Fed does more is what happens in Europe. The financial problems on the continent have hurt demand for American exports and weakened confidence globally. New industry data Wednesday showed U.S. manufacturing activity shrank in July for the second straight month as new orders continued to slip.

Referring to the eurozone debt crisis, the Fed said again in the latest assessment that “strains in global financial markets continue to pose significant downside risks to the economic outlook.”

But those strains could ease if the European Central Bank, which is scheduled to meet Thursday, undertakes more bond-buying to reduce borrowing costs for struggling countries.

Expectations for such action were fueled after ECB President Mario Draghi said last week that he would do “whatever it takes to preserve the euro.”

“The Fed may be inching closer to additional action to promote the economic recovery. … But the million-dollar question is: Will it be needed?” said Chris Rupkey, chief financial economist at the Bank of Tokyo-Mitsubishi in New York. “The nation’s unemployed will have to hang on to hope a little longer as Washington sits and watches.”

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