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Federal Reserve expected to stay the course on near-zero interest rate

By Agence France-Presse
Monday, July 29, 2013 17:38 EDT
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BenBernanke enlarged via afp
 
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The Federal Reserve holds a monetary policy meeting this week amid intense speculation about the timing of a wind-down of massive stimulus, although few expect a change in direction.

The Federal Open Market Committee will wrap up a two-day meeting Wednesday with a policy statement that will be closely scrutinized for clues on how quickly the Fed will begin to taper its $85 billion-a-month asset-purchases program.

There will be no news conference with Fed Chairman Ben Bernanke to further shed light on the central bank’s thinking, as there was six weeks ago after the prior FOMC meeting.

Bernanke suggested the Fed could begin cutting the asset-purchase program, also known as quantitative easing, later this year and end it in mid-2014 if the economy continued to improve.

Markets appeared to ignore his assertion that the Fed’s key federal funds rate, at 0.0-0.25 percent since December 2008, would not rise before 2015.

Interest rates jumped more than a full percentage point in two months, pushing mortgage rates suddenly higher, raising concerns they could snuff out the housing market recovery, one of the few bright spots in the sluggish economy.

In later comments, particularly two days of twice-yearly testimony to Congress in mid-July, Bernanke sought to assure markets that the near-zero interest rate would stay put for a while, given the “weak” economy.

“If we were to tighten policy, the economy would tank,” he told lawmakers.

The Fed has said any rate hikes still hinged on reducing the unemployment rate, now at 7.6 percent, to 6.5 percent or less, and keeping inflation tame at around 2.0 percent.

The Fed policy meeting falls between two major reports — on growth and the jobs market in the world’s largest economy.

Hours before the panel ends its deliberations on Wednesday, the Commerce Department will publish its first estimate of gross domestic product for the second quarter.

After a spate of disappointing data, economists on average are forecasting GDP growth slowed to an annual rate of 1.1 percent from 1.8 percent in the first quarter.

The July jobs report Friday was expected to show the unemployment rate ticked down to 7.5 percent from 7.6 percent in June.

But jobs growth also was seen as falling, by 20,000 to 175,000.

“Whether GDP moves up or employment down will be a key issue for the Fed as well as markets in coming months — arguably, more important than the pace for GDP in Q2,” said Jim O’Sullivan, chief US economist at High Frequency Economics.

While there was little anticipation of a change in monetary policy coming out of the FOMC meeting that begins Tuesday, analysts predicted the panel would try to improve its communications.

“Markets are pressing the Fed for better forward guidance on quantitative easing, and it would be prudent for the central bank to comply,” said Ryan Sweet of Moody’s Analytics.

Moody’s predicted the Fed will reduce its asset purchases in September by $20 billion per month, evenly split between Treasuries and mortgage-backed securities.

HFE’s Sullivan and other analysts agreed the tapering was likely to begin after the September 17-18 FOMC meeting and that expectation had already been fairly baked into the markets.

Sullivan said the post-meeting statement would probably be reworded to suggest tapering could begin soon.

Ed Yardeni of Yardeni Research said the Fed would be looking to minimize adverse market reactions.

“I wouldn’t be surprised if the 6.5 percent threshold for the unemployment rate is lowered to 5.5 percent,” Yardeni said.

Bernanke is hunting for an opportunity to taper the bond purchases “but the economic data are not giving the Fed the justification to pursue the policy it wants to have the justification to pursue,” said Robert Brusca of FAO Economics.

“And all of this has resulted in communication issues between the market and the Fed.”

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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