Analysts Say Fed Likely To Act Soon

7:08 AM, Jul 12, 2012   |    comments
US Federal Reserve (Getty Images)
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Stock markets dropped after the Federal Reserve released minutes of the policymakers' June meeting that suggested the central bank isn't close to ordering new monetary stimulus, even as a number of leading forecasters called more action both needed and increasingly likely.

The Fed's Open Market Committee believed that the economy is growing more slowly than it had seemed to be when the policymakers met in April, according to the minutes. But instead of ordering more bond purchases to pump money into the economy, the committee decided to continue its policy of pushing long-term interest rates lower by selling short-term bonds and buying longer-term paper, the Fed said.

Only "a few" members favored the more direct monetary push of bond buying, known as quantitative easing, the minutes said. But the economy has weakened enough that the Fed is likely to have to pump more money into the economy by year's end, possibly at its next open market committee meeting late this month, said Ryan Sweet, a Moody's Analytics economist.

"We still expect a third round of quantitative easing this year, and odds are better than even that it occurs at the next meeting," Sweet wrote in a note to clients. Economists at investment banks including Barclays made similar predictions.

The Standard; Poor's 500-stock index dropped by more than half a percentage point after the central bank released the minutes at 2 p.m. ET. But the S&P recovered most of the ground, closing virtually unchanged at 1341.45.

The bounce back suggests investors read the minutes as saying support within the Fed for more easing is rising, IHS Global Insight said.

The Fed's economic forecast is too bullish, said Paul Edelstein, director of financial economics at IHS.

Fed members are likely to cut their economic forecasts, and will probably ease monetary policy when they revise their predictions, he said.

"There is clearly support for further easing if the slowdown is persistent," said Barclays economist Dean Maki.

The Fed is ready to do more if it can put money into the economy without sparking inflation, the minutes reported.

By Tim Mullaney

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