Fed’s Lack of ‘Conviction’ on Outlook Signals Policy Stalemate

By Craig Torres and Vivien Lou Chen

July 16 (Bloomberg) -- A split among Federal Reserve officials widened last month: Depending on who is doing the forecasting, economic growth will either remain stalled next year or will accelerate to the fastest rate since 1999.

Minutes from the Fed’s June meeting show central bankers are less certain than they were in April over how the economy will emerge from the worst recession in a half century. Policy makers have differing assessments of how quickly credit markets will heal, and how effective a $787 billion fiscal stimulus and $1 trillion expansion of the Fed’s balance sheet will be, according to the Federal Open Market Committee’s minutes released yesterday.

“The committee as a whole lacks conviction about where the economy is going,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “Uncertainty has to make them slower to start warning about a turning point in policy.”

Central bankers left the benchmark lending rate in a range of zero to 0.25 percent last month and said the policy rate was likely to remain “exceptionally low” for an “extended period.”

The range of unemployment forecasts for 2010 widened in June to 8.5 percent to 10.6 percent, a 2.1 percentage point gap, from 8 percent to 9.6 percent in April.

The range of projections for 2010 growth showed a gap of 3.2 percentage points, up from a 2.5 percentage-point divide in April. The lowest forecast suggests the economy will grow just 0.8 percent from this year’s fourth quarter to the final quarter of 2010; the highest projects 4 percent growth.

‘Unreconciled Views’

“Uncertainty just lends itself to standing pat,” said Vincent Reinhart, former director of the Fed Board’s Monetary Affairs Division and a resident scholar at the American Enterprise Institute in Washington. “You have a committee in which a significant fraction have unreconciled views among themselves.”

Policy makers were concerned that consumer spending will resume its decline once temporary benefits to household income from the fiscal stimulus subside, the minutes showed. Some officials also saw a danger of a renewed decline in the housing market, in part as mortgage rates increase.

“Labor market conditions were of particular concern to meeting participants,” the minutes said. “With the recovery projected to be rather sluggish, most participants anticipated that the employment situation was likely to be downbeat for some time.”

Purchase Programs Unchanged

At the same time, the FOMC concluded that it was best to keep its programs for purchasing Treasuries and mortgage debt unchanged. “The effects of further asset purchases, especially purchases of Treasury securities, on the economy and on inflation expectations were uncertain,” the minutes said.

Forecasts also show members divided over whether economic growth will exceed their estimates of its long-run potential of around 2.5 percent to 2.7 percent. The difference of opinion is important because growth above potential would push down the unemployment rate faster. Unemployment stood at 9.5 percent in June, the highest since August 1983, as employers eliminated 467,000 jobs.

Growth estimates from 10 FOMC members for next year clustered in ranges above 2.7 percent, while seven were in ranges of 2.5 percent or below. The split over whether the expansion will be fast enough to restore job growth, or too slow, will complicate policy leadership for Fed Chairman Ben S. Bernanke, analysts said.

“The wide array of estimates for everything from inflation to growth and unemployment suggests that we really don’t know how this economy is going to unfold in coming months, let alone two years from now,” said Richard Yamarone, director of economic research for Argus Research Corp. in New York. “Until some of these clouds dissipate, I can’t imagine the Fed is going to take these programs off the table or change its target rate.”

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net; Vivien Lou Chen in San Francisco at +1- vchen1@bloomberg.net.