Federal Reserve minutes

Federal Reserve minutes: Fiscal cliff could hurt economy

5/16/2012By Annalyn Censky and Karen McGowan | CNNMoney.com

The Federal Reserve is worried about indecision in Congress.

At its last meeting in April, the central bank's top officials discussed how coming tax increases and spending cuts could weigh on the recovery, and debated whether the Fed should provide additional stimulus to spur consumer spending.

"Participants expected that the government sector would be a drag on economic growth over coming quarters. They generally saw the U.S. fiscal situation also as a risk to the economic outlook; if agreement is not reached on a plan for the federal budget, a sharp fiscal tightening could occur at the start of 2013," the minutes from the meeting said.

The central bank is not alone in its fear of a coming "fiscal cliff" in 2013. The Bush tax cuts, payroll tax cut and extended unemployment benefits are all set to end, at the same time that the government slashes more spending.

While the Fed also acknowledged improvement in the economy early in the year, several members expressed concern that it could be due to waning temporary factors such as warmer winter weather.

As the Fed prepares to wind down its latest round of stimulus, known as Operation Twist, some have called for the central bank to do more to fuel growth.

While those calls have yet to be answered, the minutes showed that the Fed is not ready to close the door on that option.

Fiscal cliff: What you need to know

"Several members indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough," the minutes said.

Operation Twist was designed to bring down long-term interest rates and encourage spending by shifting $400 billion from short-term to long-term bonds. Launched last September, the program is set to end in June.

Since 2008, the Fed has taken numerous steps to bolster the economy, including keeping its key interest rate near zero in an effort to give businesses and consumers cheaper access to credit.

In addition, the Fed has also enacted two rounds of asset purchases known as quantitative easing, also designed to bring down interest rates. But nearly four years later, the economy is still struggling to return to robust growth, leading many to call for more action from the Fed.

The minutes also showed that Fed members discussed the job market in great detail.

"Labor market conditions improved in recent months," the minutes said. "So far this year, payroll employment had expanded at a faster pace than last year and the unemployment rate had declined further, although it remained elevated."

At the last meeting, the Fed improved its forecast for the unemployment rate this year, but continued to believe the economy would be weak enough to warrant historically low interest rates until "at least through late 2014."

The unemployment rate was at 8.1% as of April, and the Fed expects it to fall to between 7.8% and 8% by the end of the year.

Separately, the Fed released a new schedule of two-day meetings for its policy-making committee. Previously, the meetings were set to last either one or two days.