Applications for unemployment benefits rose last week, pointing to a fourth consecutive month of sluggish hiring in June. And consumer prices were pulled down in May by a plunge in gas prices.
Weak job growth raises pressure on the Fed because part of its mission is to boost employment. And mild inflation gives policymakers more leeway to act. If inflation were threatening to accelerate, Fed policymakers might feel compelled to raise interest rates.
Fed officials are “likely to go into that meeting feeling a little chastened and looking for a way to support the economy,” said Jeremy Lawson, an economist at BNP Paribas.
Expectations that the Fed will take some action sent stocks soaring Thursday.
The Fed’s policymaking committee meets Tuesday and Wednesday.
Economists say the Fed is likely to extend a program during the meeting that swaps short-term Treasury securities for bonds with longer maturities. The program expires at the end of the month.
Known as “Operation Twist,” the goal is to further lower long-term interest rates to encourage borrowing and spending.
Diane Swonk, the chief economist at Mesirow Financial, said allowing the program to end could result in tighter credit and make it harder for Americans to buy or refinance homes.
The reason: a key part of the program is buying new mortgage-backed securities with the proceeds from those that mature. Without those purchases, banks might issue fewer mortgages.
The Fed forecast at its April meeting that the economy would grow by about 2.7 percent this year, but many economists are predicting slower growth after the economy slumped this spring. Employers added an average of only 96,000 jobs per month in past three months. Consumers barely increased spending at retail businesses in May.
Weekly unemployment benefit applications increased to a seasonally adjusted 386,000, the Labor Department said. The four-week average, a less volatile measure, rose for the third straight week to 382,000. That’s the highest in six weeks.
Applications are a measure of layoffs. When they drop below 375,000, it typically suggests hiring is strong enough to reduce the unemployment rate.
But applications have settled near or above that level since April. Many economists on Thursday said they don’t expect job growth in June to be much better than April or May.
Swonk said that the Fed might take further action later this summer, particularly if Europe’s economy worsens. A deep recession in Europe could weigh on the U.S. stock market and cut into U.S. exports, slowing American growth.
One hopeful sign is that consumers are finally seeing relief from higher gas prices, which could revive spending this summer.
The consumer price index dropped 0.3 percent in May, the Labor Department said in a separate report. The biggest, which was the decline since December 2008, was mostly because of a 6.8 percent drop in gas prices. Food costs were unchanged.
Over the past 12 months ending in May, consumer prices rose 1.7 percent, much less than April’s pace. It’s also below the Fed’s target of a 2 percent annual gain.
Average national gas prices have tumbled 41 cents after peaking April 6. The average price per gallon on Thursday was $3.53, according to AAA.
Economists expect prices to fall even further in coming months, as gas prices continue to drop.