Fed Gets Room to Ease With Little Growth or Inflation

Higher than expected jobless claims were reported today as noted in a report released by the labor department. Consumer prices also dropped by the most in three years showing that the economy is struggling to grow. This means that there is a better chance that the Fed will take more measures to stimulate the economy.

By Alex Kowalski
Jun 14, 2012 1:31 PM MT
Bloomberg

More Americans applied for jobless benefits and consumer prices dropped by the most in three years, giving the Federal Reserve room to spur an economy that’s generating little growth or inflation.

Claims for unemployment insurance payments unexpectedly climbed by 6,000 to 386,000 in the week ended June 9, Labor Department figures showed today in Washington. The cost of living fell 0.3 percent in May, led by the biggest decrease in gasoline prices in three years, the agency also reported.

Stocks rose as investors increased bets Fed policy makers meeting next week will take additional steps to boost growth and cut an unemployment rate stuck above 8 percent since February 2009. Cheaper energy costs also provide some relief for Americans against a backdrop of moderating job and wage gains that has slowed consumer spending.

“The Fed is really concerned about the outlook for employment and growth,” said Kevin Logan, the chief U.S. economist at HSBC Securities USA Inc. in New York who correctly forecast the decline in prices. “They’ve been pretty sanguine about the inflation outlook, and today’s data certainly didn’t contradict that outlook.”

The Standard & Poor’s 500 Index climbed 1.1 percent to 1,329.1 at the 4 p.m. close in New York. Shares extended gains late in the day amid reports policy makers may take steps to help economies battered by Europe’s debt crisis.

Investors were also waiting for the results of elections in Greece this weekend that may determine the fate of the euro.

Another report today showed consumer confidence climbed last week for a fourth consecutive time.

Swiss Franc

Elsewhere, the Swiss central bank pledged to keep defending its franc cap and left borrowing costs at zero to protect the economy from “exceptionally high” risks as the euro area’s crisis intensifies.

Credit Suisse Group AG and Deutsche Bank AG reduced forecasts for China’s growth this year as weakness in exports and in investment drag on the world’s second-biggest economy.

Economists projected jobless claims would fall to 375,000 from a previously reported 377,000 the prior week, according to a Bloomberg survey of 49 economists. Estimates ranged from 370,000 to 385,000.

The unemployment insurance report showed the four-week moving average of claims, a less-volatile measure, climbed to 382,000, the highest since April 28, from 378,500.

Reports ‘Disappointing’

“We’ve seen some disappointing employment reports,” said Bricklin Dwyer, an economist at BNP Paribas in New York. “The labor market is just kind of mediocre right now, not gaining much traction.”

The Labor Department’s inflation report showed energy costs decreased 4.3 percent from a month earlier. Gasoline prices slumped 6.8 percent, the largest decline since December 2008, and natural gas and fuel oil also fell.

Food costs were unchanged as gains in fruit and vegetables were offset by cheaper beverages, dairy products and meats.

Consumer prices increased 1.7 percent in the 12 months ended in May, the smallest 12-month gain since January 2011, the report showed.

Fed policy makers, who said they anticipated the run-up in energy costs would subside, aim for 2 percent inflation as part of their dual mandate of stable prices and maximum employment. Their preferred price gauge, issued by the Commerce Department and tied to consumer spending, rose 1.8 percent in the 12 months ended in April, the smallest gain in more than a year.

Fed Views

Fed Vice Chairman Janet Yellen said last week she sees more scope for easing, while San Francisco Fed President John Williams, a voting member of the FOMC this year, called on policy makers to stand ready to act should the recovery falter.

“Substantial resource slack in U.S. labor and product markets should continue to restrain inflationary pressures,” Fed Chairman Ben S. Bernanke told Congress’s Joint Economic Committee last week. With a “subdued” inflation outlook, high unemployment and “strains in global financial markets,” the central bank anticipates it will keep its benchmark lending rate near zero though late 2014, he said.

The so-called core measure, which excludes more volatile food and energy costs, increased 0.2 percent in May for a third month. They were up 2.3 percent over the past 12 months, matching the gains for years ended in April and March.

The increase in the core measure was driven by medical care, cars and airfares. A measure used to calculate how much an owner-occupied house would rent for showed a 0.1 percent last month, the smallest increase since February.

Lower Expectations

Inflation expectations have “definitely come down,” David Tehle, chief financial officer of Dollar General Corp. (DG), said during a June 4 earnings call. The Goodlettsville, Tennessee- based dollar-store chain anticipates 0.5 percent inflation for the full year, compared with 2 percent in the final three months of 2011, Tehle said.

Dollar General expects no apparel inflation this year and sees broad slowing in commodity prices, Chief Executive Officer Rick Dreiling said during the call.

The drop in the cost of living last month allowed Americans to stretch their paychecks further, another Labor Department report showed. Hourly earnings adjusted for inflation climbed 0.3 percent, the biggest increase since April 2010.

That is probably one reason confidence is improving. The Bloomberg Consumer Comfort Index rose to minus 36.4 in the week ended June 10, marking the highest level since late April, from minus 37.6 the prior period, according to another report today. Each of three components -- the economy, finances and buying plans -- advanced.

“It is likely a function of the steady drop in gasoline prices,” said Joseph Brusuelas, a senior economist at Bloomberg LP in New York. “Households feel a bit more comfortable about their own financial situation.”

To contact the reporter on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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