Fed growth forecasts key to easing as job market stalls

June 14 (Bloomberg) -- Chairman Ben S. Bernanke told lawmakers last week the “central question” confronting the Federal Reserve at its next meeting is whether growth is fast enough to make “material progress” reducing unemployment.

The answer may well be no.

Bernanke and his fellow policy makers gather June 19-20 to revise their economic projections after a report yesterday showing retail sales fell for a second month in May prompted economists at Goldman Sachs Group Inc. and Morgan Stanley to cut their growth forecasts. Fed officials, including Vice Chairman Janet Yellen, have said there’s scope for further easing at some point to reduce a jobless rate persisting above 8 percent.

“They’re not closing that employment gap as fast as they’d like, so I suspect it adds up to more action to get things moving again,” said Michael Feroli, chief U.S. economist at New York-based JPMorgan Chase & Co. and a former researcher for the Federal Reserve Board in Washington. “Bernanke has a clear economic mandate, and we’re still far from achieving it.”

Economists at Goldman Sachs yesterday reduced their tracking estimate for U.S. second-quarter growth to 1.6 percent from 1.8 percent. Morgan Stanley cut its projection 0.2 percentage point, to 1.8 percent, while Credit Suisse Group AG marked down growth for the period to 2.2 percent from 2.5 percent.

Since the Federal Open Market Committee met on April 25, the yield on the benchmark 10-year Treasury note has fallen 39 basis points, or 0.39 percentage point, to 1.59 percent yesterday as investors fled risks in Europe and saw greater odds of new Fed accommodation. The Standard & Poor’s 500 Index during the same period has slumped 5.5 percent to 1,314.88.

Greek Elections

The FOMC will gather two days after a June 17 national election in Greece that risks the country’s exit from the euro, an outcome that would deepen a crisis the Fed has identified as a chief threat to the U.S. expansion.

Yellen said on June 6 that any new Fed accommodation may entail purchasing bonds or extending a program to lengthen the average maturity of the Fed’s portfolio of debt known as Operation Twist. A declining job market and deteriorating financial-market conditions show the U.S. economy “remains vulnerable to setbacks.”

“I am convinced that scope remains for the FOMC to provide further policy accommodation,” Yellen said. “It may well be appropriate to insure against adverse shocks that could push the economy into territory where a self-reinforcing downward spiral of economic weakness would be difficult to arrest.”

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