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Fed leaders meet as recovery loses steam


POLICYMAKERS’ OPTIONS VARY


Unemployment weighs on economic growth


by Neil Irwin


As Federal Reserve policymak- ers meet Tuesday, they will face the challenge of a faltering eco- nomic recovery without a clear consensus on what, if anything the central bank should do about it.


Fed leaders still think that the


recovery is on track, though the pace of growth has slowed and the risks of a dip back into reces- sion have risen since their last policymaking meeting in late June. That should be enough to at


least get members of the Federal Open Market Committee to dis- cuss their options for boosting the economy when they meet be- hind closed doors Tuesday — in- cluding purchasing Treasury bonds or other assets, lowering the interest rate on bank re- serves, or pledging to keep inter- est rates low for longer — even if, as Fed-watchers expect, they won’t pull the trigger on any of them. There is a confusing menu of possibilities of what the Fed will do, and the committee’s decisions will be announced Tuesday after- noon. Here’s an overview of them — including outcomes that are


The biggest Apple


near-certain, some that could happen but aren’t necessarily likely, and others that are un- likely.


Near-certain The statement accompanying


the Fed’s policy announcement will very likely indicate a more subdued economic outlook than the one issued after the June 22- 23 meeting, when the officials said that the “economic recovery is proceeding” and the labor mar- ket “improving gradually.” Since then, there have been two straight weak jobs reports, new evidence that both industrial output and retail sales are grow- ing more slowly, and disappoint- ing data on second quarter growth. Look for the policymakers’


statement to acknowledge that softness and echo Fed Chairman Ben S. Bernanke’s view that the outlook is “unusually uncertain.” They are also likely to make clear that they stand ready to take further action to support the economy and prevent deflation, should conditions warrant — lan- guage that is itself meant to in- still confidence in the expansion.


Just Maybe The big question is whether


Fed officials, having adjusted their outlook, will follow it up with any substantive action. This debate comes down to two ques- tions: Will the action be effective at propping up encouraging growth and reducing the risk of deflation? And, even if it doesn’t have a direct effect, will it at least signal to financial markets that


the Fed is in a more accommoda- tive mood? One key option on the table will be to state that the Fed will maintain the current size of its balance sheet, $2.3 trillion, by buying new assets as the mort- gage-backed securities in its portfolio mature. That would have only a moderate impact in terms of increasing the money supply, but would signal that the Fed has become more worried about growth. Similarly, the Fed could


strengthen its statement that economic conditions “are likely to warrant exceptionally low lev- els of the federal funds rate for an extended period.” The policy- makers could state how long an “extended period” might be, such as two or three years. Another ag- gressive change would be to state that low interest rates are likely to be warranted until certain eco- nomic conditions are met, such at an 8 percent unemployment rate or core inflation above 2 per- cent.


Another possibility would be


to cut the interest rate on the ex- cess reserves that banks park at the central bank, currently at 0.25 percent, to zero. This would technically be a decision of the Fed’s Board of Governors, not the full FOMC, (though Bernanke, given his collaborative style, will surely allow an airing of the de- bate at the FOMC). The question they will ponder is whether the technical problems this action would create in the money mar- kets would be worth the very modest benefits it creates for the economy.


One more possibility: Eric Ro- sengren, president of the Federal Reserve Bank of Boston, could dissent from the Fed’s decision, calling for more aggressive in- tervention to support growth. And Thomas Hoenig, president of the Kansas City Fed, who has been calling for tighter monetary policy, could well chose not to dissent for the first time this year. If one or both men change direc- tion, it would be a clear signal that sentiment on the committee has shifted.


Unlikely Never say never, but a new,


large-scale program of asset pur- chases known as quantitative easing does not appear to be on the table. Rosengren and a hand- ful of other members may be open to such a move, but the cen- ter of the committee, including Bernanke, is skeptical that such steps would pack enough of an economic punch to be worth the risk of an inflation problem down the road, or of fears that the Fed is monetizing the debt, or printing money to fund deficits. If Bernanke and company were to change direction and an- nounce new asset purchases in the hundreds of billions of dol- lars, it would be a surprising out- come — and likely reflect a “risk management” approach. Under that approach, while a dip back into recession and toward defla- tion would be considered un- likely, such an outcome would be so disastrous that the Fed should take aggressive steps to head off even the risk.


irwinn@washpost.com AUTOMOTIVE Honda to recall nearly 400,000 vehicles


Honda Motor is recalling the popular Accord and Civic pas- senger cars to address problems with an ignition switch that could allow the key to be re- moved without the transmission being shifted into park, its third recall for the problem since 2003. Honda said the most recent re-


call involved 384,220 vehicles and includes 2003 model year Ac- cord and Civics and 2003-04 ver- sions of the Honda Element.


TECHNOLOGY HP shares fall after chief’s resignation


Shares of Hewlett-Packard tumbled in heavy trading Mon- day after chief executive Mark Hurd’s forced resignation from the world’s largest technology company. HP’s shares fell $3.70, or 8 percent, to $42.60 — nearing the stock’s 52-week low of $41.94. Hurd stepped down Friday af- ter allegations that he falsified ex- pense reports to conceal a rela- tionship with a former contrac- tor.


Under Hurd, HP spent more than $20 billion on acquisitions and cut more than 40,000 jobs as he helped transform the com-


TECHNOLOGY


pany from a computer and print- er maker dependent on ink sales for profits to a well-rounded tech- nology leader with a broad range of hardware and business ser- vices offerings. “We are frankly surprised and disappointed as Hurd was a strong leader and helped trans- form HP into a leading player,” said Kaufman Bros. analyst Shaw Wu in a note to investors. But, he added, HP’s “culture of winning” that Hurd helped shape will like- ly remain intact.


— Associated Press


Honda told the National High- way Traffic Safety Administration that the defect in automatic transmissions could lead to a ve- hicle rolling away and increase the risk of a crash.


Recalls of the Accord, Civic and Element are expected to begin in late September. Owners can go to www.recalls.


honda.com or contact Honda at 800-999-1009 and select option 4 for more information. — Associated Press


10-YEAR TREASURY DOWN $0.80 PER $1,000, 2.83% YIELD


CURRENCIES $1 = 85.87 YEN; EURO = $1.323


DIGEST


TUESDAY, AUGUST 10, 2010


PAUL SAKUMA/ASSOCIATED PRESS


Skype files for IPO in U.S. Skype, the Luxembourg-based Internet calling service that was con- trolled until last year by eBay, filed Monday for a U.S. initial public of- fering. Skype tentatively put the value of the offering at $100 million.


ALSO IN BUSINESS RUPERT HARTLEY/BLOOMBERG


A customer uses an iPhone to photograph the interior of the new Apple store in London’s Covent Garden shopping district, the company’s 300th retail outlet and the largest Apple store to date. The computer giant has a presence in 10 countries around the world.


Chrysler narrows its second-quarter loss


CEO says company’s health is improving but isn’t stable yet


by Frank Ahrens


Any quarter in which Chrysler is able to narrow its losses must be counted as a victory for the smallest and most beleaguered of Detroit’s Big Three, and that’s what the company was able to re- porton Monday, a little more than one year after emerging from a government-sponsored bank- ruptcy. Chrysler has sought nothing if not stability after enduring two years of chaos: a freefall in vehicle sales, near liquidation and a change in ownership, as the U.S. government and Italian automak- er Fiat took big stakes in the com- pany. On Monday, Chrysler chief executive Sergio Marchionne — also head of Fiat, which owns 20 percent of Chrysler and has man- agement control — said the com- pany’s health is improving, but it’s not well yet. “The second quarter operating profit confirms that Chrysler


Group is on track to achieve its goals, yet an extraordinary amount of work still lies ahead,” Marchionne said, adding “2010 is seen as a year of transition and stabilization.” Chrysler still lost money in the second quarter of this year — $172 million — but that was less than in the first quarter, when the com- pany lost $197 million. Even though Chrysler’s retail sales for the first half of 2010 are down 21 percent compared with 2009, which was a terrible auto sales year, the company sold more than 100,000 vehicles in one month (May) for the first time in more than two years and managed to show a 5 percent gain in July sales compared with July 2009. Chrys- ler also increased its U.S. market share from 9.1 percent in the first quarter of this year to 9.4 percent in the just-concluded second quarter.


“I think Chrysler has to succeed


by exploiting niches that the other automakers are overlooking,” said Edmunds.com chief executive Jeremy Anwyl. “They are duking it out with all brands, not just GM and Ford. They will not be in the top tier so they need to creat- edistinctive product that appeals


to the gaps in the marketplace.” New and compelling product means everything in the auto in- dustry, and Chrysler has lacked that. Even as the company teetered on the edge of liquidation, it man- aged to sell trucks, especially its popular Dodge Ram. But what be- came clear through the recession years of 2008 and 2009, however, was that Chrysler was no longer able to build sedans and coupes that Americans wanted to buy, as sales of the company’s dated-look- ing vehicles plummeted by dou- ble digits each month. An exam- ple of marketplace tone-deafness came in February, when Chrysler launched a fuchsia-colored Dodge Challenger muscle car. In recent months Chrysler has enjoyed sales success from its 2011 Jeep Grand Cherokee, the first new vehicle rolled out under Fiat control. It may take more than Jeep to


save Chrysler. The company’s long-term survival hinges on the first of several cars headed over from Italy: the Fiat 500 mini-car. The 500 — about the size of a


Mini Cooper — is a high-mileage city car and the first of other Fiat products headed to the United


States, possibly under the Chrys- ler badge. The Fiat 500 won Euro- pean car of the year in 2008. The Fiat-Chrysler tie-up will bring as many as seven new Fiat models from Italy to the United States, ac- cording to some reports. Chrysler is “going to need to


take risks that other companies aren’t, so their future may still be tumultuous,” Anwyl said. “Swing- ing for the fences means you have some misses.” In other promising news for the company, Marchionne said on Monday he is confident that Chrysler will exceed its guidance for the remainder of this year and that he expects an initial public offering sometime next year, in order to pay back the remaining $11.6 billion of a $15.5 billion gov- ernment bailout. Chrysler will closely watch General Motors’ planned initial public offering. At the same time, much of


Chrysler’s revenue is coming from fleet and government sales, which are far less profitable than retail sales. And Chrysler is still paying consumers more than the indus- try average in incentives to buy its vehicles, according to Ed- munds.com.


ahrensf@washpost.com The Company Beat JIA LYNN YANG Blogging at washingtonpost.com/companybeat Using the story of HP to sell a candidacy


The story of Hewlett-Packard in the past 10 years is like any slice of contentious history in which key players are still tussling over what really happened and competing narratives emerge. Did Carly Fiorina have the vision and guts to acquire Compaq but then lack the managerial skills to make the merger work? Was Mark Hurd the brilliant manager that Wall Street hailed him to be, until his sudden departure last Friday? The answers matter because Fiorina, a Republican, is running in the California Senate race in part on her record as HP’s former chief executive. She’s using a business story to sell her bid to unseat the three-term Democratic incumbent, Barbara Boxer. On Monday the U.S. Chamber of Commerce endorsed Fiorina, nodding to her credibility as someone who gets business. “We’re endorsing Carly because she understands the challenges businesses are facing and will stand up for the people of California during these tough economic times,” said Bill Miller, the U.S. Chamber’s senior vice president and national political director. According to a note from Fiorina’s campaign called “Carly’s Record of Success at Hewlett-Packard,” her decision to acquire Compaq paved the way for HP to become the worlds’ biggest PC maker. Boxer says Fiorina slashed jobs at HP; Fiorina says the job cuts were a result of the dot-com bust. Fiorina isn’t the only candidate this election cycle who’s leveraging business experience to gain the upper hand politically — even if that business experience is somewhat clouded by controversy. There’s also Jeff Greene, a real estate investor who’s running in Florida’s Senate Democratic primary race. Greene bet against the housing market by buying credit default swaps and earned hundreds of millions of dollars when things turned south. His rival, Kendrick Meek, has gone after Greene for making money off the housing market’s collapse. But Greene has brushed off those attacks, instead billing himself as a “proven jobs creator.”


 Cuomo expands probe: New York Attorney General Andrew Cuomo expanded his health-care credit-card probe, which has in- cluded subpoenas to JPMorgan Chase’s Chase Health Advance, Citigroup’s Citi Health, and CareCredit, a division of General Electric’s GE consumer finance unit. Cuomo last week an- nounced an investigation into what he called “predatory health care lending” in which con- sumers were allegedly misled about financing terms for health-care credit cards. Cuomo said he has issued subpoenas to 14 dental and health-care clinics. He said that some providers have pressured consumers into using the card and are rewarded with “kickbacks” in the form of


rebates.  Sara Lee’s Barnes to step down. Sara Lee chief executive Brenda Barnes will step down to focus on improving her health after a stroke, the foodmaker said Mon- day. Barnes, 56, who had been on temporary medical leave since May 14, will also leave her board of directors position. Barnes joined Sara Lee as president and chief operating officer in 2004 and became chief executive in 2005. She led the company, known for its namesake breads and brands including Jimmy Dean and Hillshire Farm, through a restructuring, which shed unprofitable plants, jobs and units to focus on its core food business.


— From news services


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