Disappointing U.S. economic data, new strains in markets and deepening worries about Europe’s fiscal crisis have prompted a shift at the Fed, putting back on the table the possibility of action to spur the recovery.
The Fed’s next meeting, June 19 and 20, could be too soon for conclusive decisions. Fed policy makers have many unanswered questions and have had trouble forming consensus in the past. Top Fed officials have said that they would support new measures if they became convinced the U.S. wasn’t making progress on bringing down unemployment. Recent disappointing employment reports have raised this possibility, but the data might be a temporary blip. Moreover, the Fed’s options for more easing are sure to stir internal resistance at the central bank if they are considered.
Their options include doing nothing and continuing to assess the economic outlook—or more strongly signaling a willingness to act later if the outlook more clearly worsens. Fed policy makers could take a small precautionary measure, like extending for a short period its “Operation Twist” program, in which the Fed is selling short-term securities and using the proceeds to buy long-term securities. Or, policy makers could take bolder action such as launching another large round of bond purchases if they become convinced of a significant slowdown.
Fed’s Bullard: Weak May Jobs Report Doesn’t ‘Substantially Alter’ Outlook May’s weak jobs report was “disappointing” but doesn’t substantially alter the economic outlook for 2012, St. Louis Fed President Bullard said in prepared remarks.
Chicago Fed President Charles Evans said in a speech in New York yesterday that “soft” U.S. economic data call for “extremely strong accommodation,” while Richard Fisher of Dallas said more easing through Fed purchases of bonds would be “pushing on a string.” James Bullard of St. Louis said there’s time to assess the economy and a policy change isn’t needed now.
As Europe careens deeper into political and economic crisis, the immediate survival of the euro turns more than ever on a single question: Will Germany act?
Now, with Greece’s euro membership hanging by a thread, Spain’s banking system in deep trouble and concerns about Italy mounting, the German government must decide whether saving the euro is worth putting the country’s own prosperity at risk.
Few Germans, however, share that sense of urgency. (…) Half the German population believes the common currency has been more of a negative than a positive for Germany, up from 43% in February, according to a poll released late last month by public broadcaster ZDF. Nearly 80% are opposed to proposals for euro nations to jointly sell and guarantee euro bonds. A solid majority believes Greece should leave the euro. (…)
The rest of the article is an excellent read to understand Germany’s ambivalence in this crisis.
Spanish industrial production fell 8.3% in a calendar-adjusted annual rate—which accounts for number of working days—in April, a more severe drop compared with March’s 7.5% decline.
INE said the biggest contributor to April’s reading was a 14.9% annual fall in capital equipment, in particular that used for the production of metal goods and cars—both key components in Spain’s export sector, the sole bright spot in Spain’s economy in recent quarters.
Meanwhile in Germany, industrial output fell sharply in April largely wiping out March’s gains, data from the country’s economics ministry showed. The data suggest further that Europe’s largest economy slowed considerably in the second quarter, following a robust, but unsustainable, 0.5% quarterly growth rate in the first three months of the year.
The ECB left its interest rates unchanged, resisting pressure to provide relief from Spain’s escalating banking crisis and the growing threat of a Greek departure from the euro area.
Demand for the European Central Bank’s unlimited one-week credit rose sharply Tuesday, hitting a level unseen since the three-year loans granted more than three months ago, amid worries about Spain.
Spain’s funding woes may be a reason behind the rise in demand. The government on Tuesday said it has effectively lost access to capital markets and urged euro-zone partners to act faster to help support its enfeebled banks.
Moody’s Investors Service cut the credit ratings of six German banking groups and Austria’s three largest banks on Wednesday, underscoring that even the euro zone’s strongest economies face risks if the region’s debt crisis deepens.
THE U.S. SLOWDOWN
There won’t be a recession “unless events in Europe develop in some way that spills over here big-time,” Buffett said yesterday at the Economic Club of Washington, D.C.
Mr. Buffett’s vantage point has been helpful in the past 2 years.
Productivity slipped at a 0.9 percent annual rate, a sharper decline than the 0.5 percent initially reported by the government.
U.S. defense contractors are preparing to disclose mass job cutbacks ahead of November elections if Congress fails to reach a deficit-reduction deal by then, industry officials said.
Firms including Lockheed Martin Corp., Boeing Co. and Northrop Grumman Corp. may idle thousands of workers at the beginning of the year, they said, when more than $50 billion in new defense cuts could take effect—along with similar reductions across federal agencies.
Recall Bid Fails in Wisconsin Gov. Scott Walker’s Win Caps Fiery Battle, Deals Public-Sector Unions a Blow. (Victory Caps Fierce Battle; High Turnout)
Walker withstood a recall effort, dealing a blow to organized labor, unsettling Obama’s re-election strategy and signaling to GOP lawmakers that challenging government unions could pay dividends.
Mr. Walker had 54% of the vote to 45% for his opponent, Tom Barrett, the Democratic mayor of Milwaukee, with 89% of the state’s precincts reporting. Turnout was heavy across the state.
The vote capped a contentious 15-month battle that polarized Wisconsin, long a centrist state, with union members and Democrats protesting angrily against Mr. Walker’s signing in March 2011 of a law removing most collective-bargaining rights from public employees.
The race drew more than $63 million in spending by the campaigns and their allies—much of that from outside Wisconsin and most of it supporting Mr. Walker—and saw nationally prominent politicians travel to the state to rally support in what was widely considered the country’s second-most-important election this year after November’s presidential contest.
Governors and legislators in GOP-led states across the country may be emboldened to pursue the same type of curbs on union-worker rights that Gov. Walker installed.