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Fed expected to hold fire despite weak U.S. growth

By Agence France-Presse
Monday, July 30, 2012 17:33 EDT
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WASHINGTON — The Federal Reserve’s top policy makers are expected to shy away from taking new economic stimulus measures when they meet Tuesday and Wednesday, instead waiting until the economic picture becomes clearer.

The interest rate-setting Federal Open Market Committee will gather for a two-day meeting in Washington under the shadow of sub-par growth in the world’s largest economy.

“We do not expect that the Fed will announce any additional action in the upcoming meeting as the ideological division among members remains strong,” said analysts at Spanish bank BBVA, reflecting a growing consensus on Wall Street.

With few tools left in the box and the outlook murky, the Fed has been reluctant to embark on a third round of asset purchases, or quantitative easing, dubbed QE3.

Instead Chairman Ben Bernanke and his colleagues have preferred to wait and see whether a recent slowdown has been a blip, or a harbinger of worse times ahead.

“We expect that this next meeting will involve serious discussions regarding QE3,” said BBVA, “however, it is more likely that the Fed will announce QE3 in the September meeting.”

With the economy periodically lurching back toward recession, the bank has facing a difficult task in calibrating its response.

Last week there was yet more ambiguous economic evidence, when the Commerce Department reported growth in the second quarter was just 1.5 percent.

While that is far from stellar, it was still better than expected.

The Commerce Department also published revisions of the last few years of growth data, which showed the recession was more shallow and the recovery patchier than first thought.

Growth in the last quarter of 2011 was revised up significantly, from 3.0 percent to 4.1 percent.

Stalking the debate are doubts that any fresh Fed action would make a meaningful difference to the US economy.

“Central bankers have taken the ball about as far down the gridiron as they can,” said Tony Crescenzi of bonds giant Pimco.

“The Fed could implement another round of asset purchases, cap Treasury rates, cut the interest rate it pays banks on excess reserves, extend further its conditional promise to keep rates low, or perhaps consider some form of credit easing,” he pointed out.

“If the Fed did any of these it would mark another courageous effort by… Fed Chairman Ben Bernanke, but it will never get the ball into the end zone.”

And waiting until September to act could also pose political problems for the Fed, which jealously guards its independence.

Republicans — whose chances of regaining the White House depend in part on the poor state of the economy — recently pressed Bernanke to foreswear any further stimulus.

Bernanke refused to tie his hands, but if he acts in September, just weeks before the November 6 elections, the backlash is likely to be fierce.

Yet with fresh jobs data due on Friday and expected to show that unemployment remains painfully high, Bernanke and his colleagues may yet be forced into a corner.

Agence France-Presse
Agence France-Presse
AFP journalists cover wars, conflicts, politics, science, health, the environment, technology, fashion, entertainment, the offbeat, sports and a whole lot more in text, photographs, video, graphics and online.
 
 
 
 
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