Fed to Meet as US Recovery Splutters
The erratic path of the three-year-old US economic recovery will weigh on Federal Reserve policymakers when they gather Wednesday amid a fresh bout of anxiety over the slow pace of revival.
The Fed’s interest rate-setting panel will end two days of meetings in Washington to decide whether more stimulus for the spluttering economy is warranted.
While Fed Chairman Ben Bernanke has sounded more positive about the state of the economy in recent weeks, high gasoline prices, slowing job growth and Europe’s debt problems will raise Fed fears of another springtime stumble.
In recent years, the US recovery has stalled heading into summer due to Middle East revolutions, European debt crises and Japanese earthquakes.
With that burned into the collective conscience, US economists, policymakers and Wall Street have recently exhibited the kind of self-doubt normally seen in awkward teenagers.
There has been “a recurring and almost maddening ‘stop-go’ pattern to this recovery – stronger pulses followed by lulls,” said Joshua Feinman, chief global economist for DB Advisors.
“There does seem to be an underlying improvement in the US economy, albeit a modest and erratic one, very much of the ‘two steps forward, one step back’ variety.”
The latest significant setback came with March unemployment figures, which showed the unemployment rate dropping to 8.2 per cent but the economy creating a meagre 120,000 jobs. That puts the Fed in a difficult spot.
Shorn of the ability to cut interest rates further – they are already at close to zero – the Fed will have to decide whether or not to increase controversial asset purchases.
The bond and security buying was designed to lower real interest rates, prop up prices and fuel growth-engendering borrowing.
But many inside the Fed remain concerned the measures, known to economists as quantitative easing, will fuel inflation.
Outside the Fed, emerging market countries have complained that the moves weaken the dollar, making US exports unfairly cheap.
They are “paying a high price” for loose monetary policies of advanced economies, Brazil’s Finance Minister Guido Mantega said on Friday.
Faced with a moderate, if uncertain, economic outlook, and good reasons not to push ahead with new stimulus, the Fed is expected to keep what measures it has in place and be prepared to move should things improve or worsen.
“Despite some choppiness in the monthly data, several measures of activity have grown at a solid pace in Q1. An outlook of continued modest growth will likely be sufficient to keep the Fed in ‘wait and see’ mode,” said Peter Newland, an economist at Barclays.
Absent of any surprise shift by the Fed, investors will look more closely at the central bank’s economic forecasts and whether it alters its expectation that rates will not rise until late 2014.
“The committee’s statement, Bernanke’s press conference and updated forecasts will be sifted for clues about future policy,” said Nigel Gault of IHS Global Insight.