Fed Signals More Steps To Spur Economy Amid Slower Growth

Chairman Ben S. Bernanke held off on stepping up record stimulus even as consumer spending flagged, economic growth slowed and unemployment persisted at 8.2 percent. Before their next meeting starts Sept. 12, Bernanke and his colleagues will assess reports on unemployment in July and August, and the European Central Bank may take steps to ease Europe’s debt crisis at a meeting tomorrow.

Bernanke in congressional testimony last month said the central bank may ease further should U.S. employment fail to steadily improve. A Labor Department report on Aug. 3 will probably show that the economy added 100,000 jobs in July, while the jobless rate was unchanged at 8.2 percent, according to the median estimate in a Bloomberg News survey of economists.

“It’s very important that we see sustained progress in the labor market and avoid deflation risk,” Bernanke said in July. “Those are the things we’ll be looking at as the committee meets later this month and later this summer.”

The FOMC said in today’s statement that “household spending has been rising at a somewhat slower pace than earlier in the year.”

The Fed left unchanged its statement that economic conditions would likely warrant holding the benchmark Fed funds rate near zero “at least through late 2014.”

The Fed is also watching “two main sources of risk,” Bernanke said. The first is the so-called fiscal cliff, about $600 billion of spending cuts and tax increases that will go into force in January and impair growth unless Congress acts.

Congressional leaders said yesterday they will vote in September on a $1.047 trillion, six-month stopgap measure that would keep the government operating after the start of the fiscal year on Oct. 1. The measure would give lawmakers more time to debate how to avoid the fiscal cliff.

The second risk is that the European debt crisis will create turmoil in global financial markets, Bernanke said.

ECB President Mario Draghi is attempting to build consensus among governments and central bankers for a plan to ease borrowing costs in Spain and Italy before policy makers convene tomorrow. Also tomorrow, the Bank of England in a statement will probably maintain its bond purchase program.

Draghi sparked a global market rally last week with a pledge to do “whatever it takes to preserve the euro.” Last month, the ECB cut its benchmark interest rate to a record low of 0.75 percent.

The U.S. two-year interest-rate swap spread, a measure of stress in bond markets, traded today at about 20.5 basis points, about the lowest in a year and down from 2012’s high of almost 60 basis points in October. The gauge, which dropped 4.4 basis points in July for the second straight monthly decline, widens when investors seek the perceived safety ofgovernment securities and narrows when they favor assets such as corporate bonds.

U.S. consumers are cutting back as Europe’s debt crisis and looming U.S. tax-policy changes dent confidence. Household consumption, which accounts for about 70 percent of the economy, rose at a 1.5 percent rate from April through June, down from a 2.4 percent gain in the prior quarter, according to Commerce Department data.

Manufacturing in the U.S. unexpectedly contracted for a second month in July, a report today from the Institute for Supply Management showed. The ISM’s factory index was 49.8 last month, close to the three-year low of 49.7 reached in June. Fifty marks the dividing line between expansion and contraction.

Seventy-four percent of economists in the Bloomberg Survey said the Fed wouldn’t change its statement that it expects low interest rates through at least 2014. Ninety-six percent said the central bank would not lower the interest rate paid on reserves that banks keep with the Fed, with 74 percent never expecting such a move.

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