by Binyamin Appelbaum
The odds surely increased Friday that the Federal Reserve will ride again to the rescue of the faltering economic recovery, making borrowing a little cheaper for a little longer, as it has done repeatedly over the last four years.
But the government’s announcement that employers added only 69,000 workers in May also highlights a less comfortable reality: The economy seems unable to wean itself from dependence on the Fed’s flow of aid. It keeps coming back for more.
What began as a one-time jolt in 2008, an unprecedented effort to revive economic activity, has become an uncomfortable status quo, an enduring reality in which savers are punished and borrowers rewarded by a permafrost of low interest rates.
And the Fed, acutely uneasy with this new role in the American economy, may now find itself unable to avoid doubling down.
Although Fed officials have said repeatedly that they were reluctant to expand what has already been a substantial campaign to stimulate growth, the slowing rate of job creation suggests that they have not done enough. And there’s little prospect that Congress will rise to the occasion.
A Morgan Stanley economist and former head of the Fed’s monetary policy division, Vincent Reinhart, said Friday that the odds had climbed to 80 percent that the Fed’s policy-making committee would announce new measures at its next meeting in three weeks.
The most likely option: buying several hundred billion dollars of Treasury securities and mortgage-backed securities in a fourth round of purchases that could expand the Fed’s portfolio to $3 trillion, a once-inconceivable sum.
In a note published after the jobs report, Mr. Reinhart said the central bank was likely to act unless it was paralyzed by internal conflicts, “or the unlikely event that the situation in Europe is clarified in a positive way surprisingly soon.”
Other analysts doubt that the Fed will act so soon as June. Ben S. Bernanke, the Fed’s chairman, and other senior officials have made clear that the trajectory of economic growth must shift substantially before the Fed adjusted its current policies.
“As long as the U.S. economy continues to grow sufficiently fast to cut into the nation’s unused economic resources at a meaningful pace, I think benefits of further action are unlikely to exceed the costs,” William Dudley, president of the Federal Reserve Bank of New York, said Wednesday. Mr. Dudley’s remarks received particular attention because he is the vice chairman of the Fed’s policy-making committee, and is generally careful to remain publicly consistent with Mr. Bernanke.
It seems unlikely that one month of jobs data will be sufficient to cause him to shift on such an explicit judgment, but the news on Friday was worse than one month of bad numbers. The government also significantly reduced its estimate of job creation over the last few months, creating an impression of a longer-term trend of slowing growth.
Moreover, the news from the rest of the world has been grim. Europe continues to flirt with crisis, and the growth of emerging economies like China and India is showing disconcerting signs of an inopportune slowdown.
The president of the Federal Reserve Bank of Boston, Eric Rosengren, said Wednesday for the first time that the Fed should act. “I believe further monetary policy accommodation is both appropriate and necessary,” Mr. Rosengren said. “The U.S., like many other countries, needs to facilitate a more rapid recovery.”
While Mr. Rosengren does not hold one of the 12 votes on the policy-making committee this year, his remarks suggest that Fed officials who pressed for action last year, then fell silent earlier this year, are once again growing restive.
On the other hand, the American economy continues to add jobs, and a revised estimate of economic activity in the first quarter, which the government published Thursday, provided further evidence of consistent, if mediocre, growth.
Fed officials also are concerned that their policies cannot fix some of what is ailing the economy. Low interest rates make no difference to borrowers who cannot qualify to refinance or businesses that cannot persuade banks to take risks. Each successive round of Fed interventions has produced a diminishing return as interest rates are compressed toward zero. Inflation has remained at roughly 2 percent a year, the level the Fed regards as healthy.
Mr. Bernanke may provide greater clarity when he testifies Thursday before Congress’s Joint Economic Committee. In the meantime, some Fed watchers said that they thought the central bank would wait as long as possible before acting.
Paul Ashworth, chief United States economist at Capital Economics, said the prospect of action was not “the near-certainty that some commentators seem to believe.”
The Fed’s choices will be made against the backdrop of a presidential campaign whose outcome may be determined by the health of the economy. Already the Fed faces loud demands from liberals to act forcefully, and anger from conservatives over the measures that it has taken already. It seems likely that whatever choices it makes will draw fresh anger, which could actually provide its own peculiar kind of insulation.
There are limited options for additional action. The Fed generally guides the economy by adjusting short-term interest rates, but it has held rates near zero since December 2008, and has said that it planned to keep rates near zero until late 2014, at least. Even an extension of that promise would have little impact on interest rates.
That leaves bond purchases, the Fed’s major tool during the current crisis. In 2009 and 2010, the Fed bought more than $2 trillion of Treasury and mortgage-backed securities, forcing private money into investments that carried higher risks and driving down borrowing costs for businesses and consumers.
More recently, the Fed has sold short-term Treasuries to finance the purchase of $400 billion in long-term Treasuries, putting further downward pressure on long-term rates without expanding its portfolio. Those purchases end in June.
The forecasting firm Macroeconomic Advisers said that it would be difficult for the Fed to extend that strategy, nicknamed Operation Twist, because it is running out of short-term Treasuries and risks cornering the market for long-term Treasuries, which are used as grease and ballast in a wide range of transactions.
Instead, Macroeconomic Advisers said that the Fed would have to return to expanding its portfolio, a policy that most likely would include new purchases of mortgage-backed securities, in part to focus the impact on driving down the interest rates on mortgage loans.
“If they do anything, more likely it would be these outright purchases,” said Antulio Bomfim, a managing director at the firm and a former Fed economist.
He said the firm still was updating its forecast of what the Fed would do next, but added that the situation clearly was deteriorating. Looking out the window of his Washington office on a day of storm clouds and tornado warnings, he said, “The weather outside certainly seems consistent with the economic data.”
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