Another reason the Federal Reserve may have additional room for monetary easing: Inflation expectations fell sharply in May, according to the latest Thomson Reuters/University of Michigan survey of consumer sentiment. Inflation expectations five years out dropped to 2.7 percent in May, the lowest since January. Fed officials often say expectations are a key leading indicator of actual price increases.

Daniel Silver, economist at JP Morgan:

This level of longer-term inflation expectations is towards the bottom of the range that has been reported in recent years – 2.7% has been hit on several occasions (most recently between October 2011 and January 2012) and 2.6% was only reached back in December 2008 and March 2009, early on in the crisis period. Most other inflation measures that the Fed watches (including core PCE inflation and the 5yr-5yr breakeven inflation rate) have signaled that inflation expectations are still anchored and underlying inflation pressure is modest.

The downshift comes in the wake of inflation figures for April that also pointed to a tame price environment. This is why Eric Green at TD Securities argues “U.S. inflation favors the doves.”:

In many ways the release today is emblematic of what we expect to see on the inflation front over the next six months. That is, steady disinflation on headline prices (driven by roll over and seasonal effects from energy prices) and stable core prices. Headline inflation will fall through core next month as energy prices alone virtually ensure a gain of no more than 0.1%, probably less. As headline inflation drifts to 2.0% y/y next month (from 2.3% y/y April) and 1.8% y/y by August, the inflation metric will work in favor of the more dovish contingent on the FOMC.

Still, deflation fears, a key underpinning of the Fed’s second round of quantitative easing, are not likely to make a comback, says Green:

That does not mean we are in a period of disinflation akin to the pre-QE2 period.  Inflation will not be the cause célèbre of more accommodation, it will merely be removed as a potential obstacle among those favoring stronger growth, and truth be told, higher inflation.

Asian Americans have the highest rate of long-term joblessness of any ethnicity in the United States, according to a report from the Economic Policy Institute, a liberal think tank in Washington.

Last year marked the second year in a row that Asian Americans had the largest share of unemployed workers who were unemployed long term (i.e., for six months or more). In 2011, 50.1 percent of the Asian American unemployed were unemployed long term, up from 48.7 percent in 2010. In both of these years, the Asian American share slightly exceeded the African American share.

Federal Reserve Chairman Ben Bernanke and other central bank officials have argued long-term unemployment is an enormous challenge, but have been reluctant to apply additional monetary stimulus to the problem. In March, Bernanke said:

Although most spells of unemployment are disruptive or costly, the persistently high rate of long-term unemployment we have seen over the past three years or so is especially concerning.

On again, off again. That’s been the story with prospects for another round of monetary stimulus from the Federal Reserve. Expectations for a third installment of quantitative easing, the much-debated QE3, had ebbed with improving economic data in the first quarter – but are now flowing anew.

Following a weak employment report for last month, the latest hint that more bond buys could be in the offing came from minutes of the central bank’s April meeting, which saw the Fed leave rates near zero and repeat that it would likely hold them there until at least late 2014. Policymakers appeared to be taking an increasingly dim view of economic prospects given an array of looming threats to growth, even if none are particularly new.

According to the minutes:

Participants identified several downside risks to the projected pace of economic expansion, including the fiscal and financial strains in the euro area and the possibility of an abrupt fiscal consolidation in the United States.

To Millan Mulraine at TD Securities, the more negative tone suggested a modestly greater inclination to lean in the direction of easing. In particular, Mulraine singles out this sentence in the minutes:

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.

Writes Mulraine:

Economists don’t agree on much but they do tend to converge on one idea – productivity improvements are the key to long-term prosperity. Except that who benefits from productivity increases matters as much as the efficiency gains themselves, according to two reports from the liberal Economic Policy Institute in Washington.

The first finds that rising income inequality in the United States means that the benefits of better productivity are accruing mainly to the very wealthy. The EPI offers this startling nugget of data as basic food for thought: U.S. productivity grew 80.4 percent from 1973 to 2011, while average hourly compensation rose just 39.2 percent in the same period, and median compensation, which excludes outliers, gained a paltry 10.7 percent.

Writes Lawrence Mishel, EPI president and author of the reports:

Productivity growth, which is the growth of the output of goods and services per hour worked, provides the basis for the growth of living standards. However, the experience of the vast majority of workers in recent decades has been that productivity growth actually provides only the potential for rising living standards: Recent history, especially since 2000, has shown that wages and compensation for the typical worker and income growth for the typical family have lagged tremendously behind the nation’s fast productivity growth.

John Tasini, a labor activist who made an unsuccessful bid for the U.S. Senate in 2006, puts the disparity in perspective by calculating what the minimum wage would be if its rise had kept up with productivity growth, as it did before the mid-1970s.

The minimum wage today, if it reflected productivity gains over the last 30 years, should be between $19-$20 an hour. Raising the minimum wage, then, to $8.50 an hour seems like a big deal – except when you understand that it hides the vast robbery that has taken place of the past 30 years and it certainly will not make it possible for people to live with dignity and respect.

Weak U.S. economic growth in the first quarter was driven in part by a pullback in business investment — but a sharp decline in government spending also played a role. Gross domestic product grew 2.2 percent, well short of the Reuters consensus forecast of 2.5 percent. Business spending fell 2.1 percent while government expenditures saw a 3 percent drop linked to lower defense spending. Consumer spending proved a bright spot in the report, climbing 2.9 percent. Still, there is concern that this too could fade because an unusually warm winter may have brought some spending forward.

Jay Feldman at Credit Suisse breaks down the numbers:

The big downside surprise from our vantage point was in federal government spending, which contracted 5.6% in the quarter (we expected an increase given the firmer readings in monthly Treasury data). Most of the shortfall was concentrated in defense (-8.1%). Combined with the ongoing contraction in state and local government output (-1.2%), the government sector overall shaved 0.6 percentage point from top line GDP.

Yet this pales in comparison to what might happen if Congress fails to break a budget logjam by the end of this year. If left unaddressed, the resulting spending cuts and expiring tax breaks — the dreaded fiscal cliff — could easily tip the world’s largest economy back into recession.

Of all the questions Federal Reserve Chairman Ben Bernanke was asked during his press conference on Wednesday, one appeared to pique his interest in particular: Was he being less aggressive as central bank chairman than the advice he dished out to Japan as an academic in the 1990s would prescribe?

It was the second half of the question asked by Binyamin Applebaum and yet the chairman was eager to get right to it: “Let me tackle that second part first,” he began.

Applebaum may have been channeling the Nobel-winning economist Paul Krugman, a Princeton colleague of Bernanke’s and critic of Fed policy, who recently argued the Fed chief was being inconsistent and overly cautious.

Bernanke argued that the Fed has done a lot already to support growth and bring down unemployment. Actively aiming for higher inflation with additional use of unconventional tools would risk the central bank’s long-term credibility. Here is his answer in full:

So there’s this view circulating that the views I expressed about 15 years ago on the Bank of Japan are somehow inconsistent with our current policies. That is absolutely incorrect. My views and our policies today are completely consistent with the views that I held at that time.

I made two points at that time to the Bank of Japan. The first was that I believe that a determined central bank could and should work to eliminate deflation – that is, falling prices. The second point that I made was that when short-term interest rates hit zero, the tools of a central bank are no longer – are not exhausted. There are still other things that the central bank can do to create additional accommodation.

Now, looking at the current situation in the United States, we are not in deflation. When deflation became a significant risk in late 2010, or at least a modest risk in late 2010, we used additional balance sheet tools to help return inflation close to the 2 percent target. Likewise, we have been aggressive and creative in using non-federal-funds-rate-centered tools to achieve additional accommodation for the U.S. economy.

So the very critical difference between the Japanese situation 15 years ago and the U.S. situation today is that Japan was in deflation. And, clearly, when you’re in deflation, and in recession, then both sides of your mandate, so to speak, are demanding additional accommodation. In this case, we are not in deflation. We have an inflation rate that’s close to our objective.

Now, why don’t we do more? Well, first I would again reiterate that we are doing a great deal. The policy is extraordinarily accommodative. We – and I won’t go through the list again, but you know all the things that we have done to try to provide support to the economy. I guess the question is, does it make sense to actively seek a higher inflation rate in order to achieve a slightly increased reduction – a slightly increased pace of reduction in the unemployment rate?

The view of the committee is that that would be very reckless. We have – we, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in that we’ve been able to take strong accommodative actions in the last four, five years to support the economy without leading to an unanchoring of inflation expectations or a destabilization of inflation. To risk that asset for what I think would be quite tentative and perhaps doubtful gains on the real side would be, I think, an unwise thing to do.

Federal Reserve Chairman Ben Bernanke was asked about the discrepancy between individual rate forecasts of policymakers, many of whom — represented as dots on a chart — see rates rising in the next couple of years, and the Federal Open Market Committee’s statement that it sees rates staying low until late 2014. Bernanke’s answer was clear: the FOMC is king.

The individual projections are inputs to the committee decision, so the committee decision is the critical element in that respect. The committee was quite comfortable with the consensus that we have reported today.