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The Federal Reserve Board building in Washington, D.C.

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Mounting signs of a slower and choppier U.S. recovery have sparked a discussion at the Federal Reserve about whether the world's biggest economy needs another emergency jolt.

Most of the talk among policy makers at the U.S. central bank lately has been about when to pull back from the extraordinary measures used to fight the recession. But at their last meeting in June, according to minutes released Wednesday, they debated whether new measures are warranted given the recent evidence.

Fed chairman Ben Bernanke and his panel of top officials also cut their forecasts for U.S. economic growth amid stubbornly high unemployment and slowing inflation, according to the minutes of the June meeting, when the central bank reiterated its pledge to keep the main U.S. interest rate near zero for "an extended period."

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They did not view the situation as urgent enough to introduce new steps, but the mere mention of additional measures suggests Fed officials are concerned about the pace of the rebound and the limited effect that their existing policies have had on the labour market and on sustaining confidence among consumers and businesses. Actions they could take, if deemed necessary, range from tweaking the wording of their announcements to imply borrowing costs could be kept at rock-bottom levels for even longer, to buying more securities to support stocks and the overall financial system.

U.S. central bankers will "consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably," the minutes said, adding that that outlook had already "softened."

Hours before the release, three separate reports showed a second straight month of sliding retail sales in the U.S., where consumer spending accounts for about 70 per cent of the economy; the steepest drop in import prices since early 2009; and the smallest gain in inventories this year as companies brace for weaker demand.

The grim data help explain opinion polls that indicate most Americans believe the economy is either back in recession or never really left it, and provide more bad news for the bulk of Canadian exporters who still rely on the U.S. market.

"The economy's growing, but that's not making a meaningful difference in the financial lives of the vast majority of Americans," said Mark Zandi, chief economist at New York-based Moody's Analytics. "It's kind of a fragile growth, and while the economy is continuing to recover, it could easily be derailed. People are right to be nervous."

The effects of the European debt crisis on financial markets - which in June pushed the benchmark Standard & Poor's 500 stock index down more than 5 per cent - and the Fed's prediction that unemployment will remain high for "several years" caused policy makers to cut their 2010 growth forecast to between 3 per cent and 3.5 per cent from between 3.2 per cent and 3.7 per cent.

They also cut their inflation forecast, to a range of 1 per cent to 1.1 per cent, well below the U.S. central bank's comfort zone for price gains.

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The revised forecasts and the drop in retail sales - led by car manufacturers, which have struggled since recession-era government incentive programs expired - underscore the dicey political climate for President Barack Obama's Democratic Party as midterm Congressional elections approach, with jobs and the economy already the central issues.

A Bloomberg National poll released Wednesday showed that more than seven in 10 Americans believe the economy isn't growing, despite the fact that the recession ended last summer. In addition, the survey results showed most voters view getting people back to work as a priority, but more than half say the bloated U.S. budget deficit is "dangerously out of control" and are wary of more federal stimulus spending.

Americans are even closely divided on whether to push back the end of jobless benefits for the millions of unemployed whose aid runs out this month, suggesting why lawmakers have been unable to agree on an extension.

Measures that Fed officials are reportedly debating include promising to keep borrowing costs low until certain specific economic conditions are realized, paying less interest to banks for extra cash that they park at the Fed - so that they would be more likely to lend it to consumers and businesses instead - and buying more mortgage-backed securities.

Still, the minutes indicate that the Fed continues to explore longer-term strategies for getting rid of the piles of housing-related securities that the central bank accumulated during the financial crisis to help keep the U.S. banking system afloat. Those purchases still make up about $1-trillion (U.S.) of the near-record-high $2.3-trillion of assets now on the Fed's balance sheet.

A return to purchasing securities is "several months" away and would only occur if growth in the U.S. slowed to less than about 2 per cent, Mark Vitner, a senior economist at Wells Fargo & Co. in Charlotte, N.C., said in an interview.

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"Right now the Fed is simply monitoring the situation; they don't want to go out and buy more securities until they have to," Mr. Vitner said. "They would probably start by just reinvesting the funds from securities that are maturing or being paid off, but ultimately they may have to do it."


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Economics/business writer

Jeremy has covered Canadian and international economics at The Globe and Mail since late 2009. More

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