At their last meeting, several Fed policy makers said the central bank should consider developing “new tools” to help support a stronger economic recovery, without specifying what those tools might be.
Policy makers also discussed the prospect that Europe’s financial crisis could spill over to the U.S. financial system and said the continent’s debt crisis is intensifying risks to the U.S. outlook.
Underscoring the range of views on the risks from Europe, billionaire Warren Buffett said the region’s currency is doomed to fail without changes in how it works, while JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon told analysts Europe is making progress in solving its crisis.
“You see progress, you know, two steps forward, one step back,” Dimon said July 13 in a meeting in New York. Buffett, speaking the same day in a Bloomberg Television interview from Sun Valley, Idaho, said European leaders face “major problems” and the 17-country euro area may not survive.
U.S. central bankers have also identified the so-called fiscal cliff as a threat to the outlook for growth. Unless Congress acts, $600 billion in tax increases and spending cuts are set to take effect automatically at the start of next year.
The International Monetary Fund cut its 2013 global growth forecast yesterday to 3.9 percent compared with its April forecast of 4.1 percent.
The Fed, aiming to promote financial-market stability and fuel growth, has held interest rates near zero since December 2008 and purchased $2.3 trillion of securities in two rounds of large scale asset purchases.
When the central bank completes its extension of Operation Twist at the end of 2012 it will have exchanged $667 billion of short-term debt for longer-term securities. Several central bankers said extending the program will probably have a “modest” effect on already-low interest rates. Richmond Fed President Jeffrey Lacker dissented from the decision, arguing the move would do little to help growth or employment.
San Francisco Fed President John Williams and the Chicago Fed’s Charles Evans said last week the central bank could step up stimulus through a third round of asset purchases, including buying mortgage-backed securities.