Faced with lacklustre hiring, the U.S. Federal Reserve is pivoting toward fresh action to spur economic activity.
For the Fed, the question no longer appears to be "if" but "when" further moves will be required to jump start the weakest recovery of the post-Second World War period.
In a statement Wednesday, the Fed painted a more pessimistic portrait of the state of the U.S. economy and signalled its readiness to undertake more measures to stimulate growth.
That raised expectations the central bank could act at its next policy meeting in September. After that point, some economists say, the window closes for several months because the Fed is unlikely to announce any new moves so close to the November presidential election.
There is little to suggest the U.S. economy has shaken its malaise, with growth managing to shuffle ahead while unemployment remains stubbornly high. Although some key sectors are improving – notably housing – the broader economy is still grappling with the overhang of the financial crisis, not to mention the undertow of Europe's debt debacle.
The most recent reading, for the second quarter, showed that economic output expanded at an annualized pace of 1.5 per cent, a meagre rate that economists view as perilously close to a stall. Unemployment stood at 8.2 per cent in June, and has remained basically unchanged since the start of the year.
The Fed acknowledged the bleaker picture in its statement at the conclusion of its two-day policy meeting. "Economic activity decelerated somewhat over the first half of this year," it noted. It also said it "will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery."
Barring positive surprises – for example, concrete action by European policy makers toward solving their debt crisis, or robust payroll growth in the U.S. – the Fed appears poised to take the plunge.
The sense one gets from Wednesday's statement is that the central bank is "concerned that some bad shoes could drop in the coming weeks and months," said Michael Prell, a former head of research at the Fed who is now an independent consultant. A majority of the Fed's policy-making committee "has a clear easing bias," he added.
The Fed's decision to do nothing for the moment might reflect a desire to see more data, particularly on hiring trends, before deciding on a course of action, say economists. A much-watched employment report is scheduled for this Friday and another for the first week in September, after which the Fed's policy committee will reconvene.
There is a fierce debate under way – both inside and outside the Fed – about which fresh measures it should employ and whether they would have anything more than a modest impact on overall economic growth.
To rescue the U.S. economy from the aftermath of the financial crisis, the Fed pulled as strongly as it could on the controls at its disposal (lowering interest rates) and also invented some new ones (creating money to buy a swath of assets). While those moves managed to pull the economy out of its nosedive, it is still having trouble gaining altitude.
Fed chairman Ben Bernanke has said the bank has several options. It could tell investors it intends to maintain near-zero interest rates for a longer period of time, or create money to launch a new round of bond purchases – both of which would lower long-term interest rates. It could reduce the interest it pays to banks on the reserves they hold at the central bank in a bid to spur lending. It could even lend money directly to banks.
"If you wonder whether the Fed can still help, just ask yourself what would happen to the housing market if the Fed brought mortgage rates down to zero," said Dan Greenhaus, chief global strategist at trading firm BTIG LLC in New York (who hastened to add that while such a move is theoretically possible, it is very unlikely).
Some economists argue that given the lingering effects of the credit crunch and various global headwinds, the U.S. economy is muddling through relatively well. "I'm not as depressed as a lot of the headlines," said Bob Baur, chief global economist for Principal Global Investors. "We can be affected by an external shock, but internally, I just don't see the excesses that usually lead to a recession."