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Experts expect Federal Reserve to take steps to bolster economy

WASHINGTON — The U.S. job market is flagging and consumer prices are barely rising. The picture sketched by data released Thursday has made some economists predict the Federal Reserve will announce some new step to boost the economy when it meets Tuesday and Wednesday.

Applications for unemployment benefits rose last week, pointing to a fourth straight month of sluggish hiring in June. And consumer prices were pulled down in May by a plunge in gas prices.

Weekly unemployment benefit applications increased to a seasonally adjusted 386,000, the Labor Department said. The four-week average, a less volatile measure, rose for the third straight week, to 382,000. That's the highest level in six weeks.

Weak job growth raises pressure on the Fed because part of its mission is to boost employment. Mild inflation gives policymakers more leeway to act. If inflation were threatening to accelerate, Fed policymakers might feel compelled to raise interest rates.

Fed officials are "likely to go into that meeting feeling a little chastened and looking for a way to support the economy," said Jeremy Lawson, an economist at BNP Paribas.

Economists say the Fed is likely to extend a current program during next week's meeting that swaps short-term Treasury securities for bonds with longer maturities. The program expires at the end of the month.

Known as "Operation Twist," the goal is to further lower long-term interest rates to encourage borrowing and spending.

Diane Swonk, chief economist at Mesirow Financial, said allowing the program to end could result in tighter credit and make it harder to buy or refinance homes.

The reason: A key part of the program is buying new mortgage-backed securities with the proceeds from those that mature. Without those purchases, banks might issue fewer mortgages.

The Fed forecast at its April meeting that the economy would grow about 2.7 percent this year. But many economists are predicting slower growth after seeing the economy slump this spring. Employers added an average of only 96,000 jobs per month in past three months. Consumers barely increased spending at retail businesses in May. And European leaders are struggling to contain their financial crisis, which has already plunged much of the region into recession.

"You look at all this and say, 'Where's the growth going to come from?' " Lawson said.

One hopeful sign is that consumers are finally seeing relief from higher gas prices, which could revive spending this summer.

The consumer price index dropped 0.3 percent in May, the Labor Department said in a separate report. It was the largest decline since December 2008 and mainly because of a 6.8 percent drop in gas prices. Food costs were unchanged.

Over the past 12 months ending in May, consumer prices rose 1.7 percent, much less than April's pace. It's also below the Fed's target of a 2 percent annual gain.

Experts expect Federal Reserve to take steps to bolster economy 06/14/12 [Last modified: Thursday, June 14, 2012 10:03pm]
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