Bernanke Confronts Fizzling Recovery

Photograph by Jae C. Hong/AP Photo

A job fair expo in Anaheim, California.

With Aki Ito

The key question hanging over the next Federal Reserve meeting June 19-20 is whether economic growth is fast enough to cut the jobless rate. That’s looking less and less likely after unemployment ticked up again.

Chairman Ben S. Bernanke and his colleagues will revise their economic projections and consider their next steps amid a deteriorating recovery that’s prompted Wall Street to cut growth forecasts. Fed Vice Chairman Janet Yellen said June 6 that the economy “remains vulnerable to setbacks” and may warrant additional monetary stimulus.

The recovery has started to look less certain since the last FOMC meeting on April 25. The economy grew more slowly in the first quarter than previously estimated, expanding at 1.9 percent, down from a 2.2 percent prior estimate. U.S. unemployment rose to 8.2 percent in May from 8.1 percent, while job growth in May was the weakest in a year.

“They’re not closing that employment gap as fast as they’d like,” said Michael Feroli, chief U.S. economist at JPMorgan Chase and a former Fed researcher. “I suspect it adds up to more action to get things moving again.”

Goldman Sachs economists cut their second-quarter growth estimate to 1.6 percent from 1.8 percent. Morgan Stanley’s lowered theirs 0.2 percentage point to 1.8 percent.

The Fed itself is divided on how to react.

Dallas Fed President Richard Fisher opposes more easing, and Atlanta’s Dennis Lockhart has signaled that he wants to wait before taking action. San Francisco’s John Williams says flagging payrolls growth means the central bank should stand ready to act if the recovery falters, while Chicago’s Charles Evans favors “pretty much any accommodative policy.”

If Bernanke and his FOMC colleagues cut their growth and employment forecasts at next week’s meeting, it would help the chairman justify more accommodation, now or at a later meeting, economists said.

“What he needs to see is growth become established at a 3 percent or faster rate to bring the unemployment rate down at a decent clip,” said John Ryding, co-founder of RDQ Economics LLC in New York and a former Fed researcher. “The chairman is sympathetic to the perspective that the Fed should do more to promote growth.”

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