Fed speaks again as weak indicators cloud outlook
WASHINGTON (AFP) – US Federal Reserve chairman Ben Bernanke is set to give his second-ever press conference Wednesday as signs of weakness in the world’s biggest economy cloud prospects for a stimulus reduction.
The central bank’s Federal Open Market Committee (FOMC) on Tuesday debated an eventual exit strategy from the more than $2.3 trillion of support the Fed has pumped into the economy since the 2008 financial meltdown.
Financial markets keenly awaited the conclusion of the two-day FOMC meeting, hoping to parse its policy statement, and Bernanke’s second-ever post-meeting briefing, for clues on the direction of interest rates.
The Fed will also publish updated estimates on economic growth, unemployment and inflation.
IHS Global Insight analysts Patrick Newport and Nigel Gault warned that, “with growth signals coming in weak, inflation signals uncomfortably high, and financial markets still worried about the eurozone sovereign debt crisis,” Bernanke would face tougher questions than at his first briefing on April 27.
A change in near-zero interest rates was essentially ruled out.
Since December 2008, the Fed has kept its key target interest rate between zero and 0.25 percent in an effort to boost economic growth, and has promised repeatedly to leave it there for “an extended period.”
Most experts anticipate the FOMC will signal that the Fed’s $600 billion asset purchase program, or quantitative easing, dubbed QE2, will end as scheduled by June 30, and no other QE program will be announced.
“The economy has not deteriorated enough to require QE3 and for this reason we believe that the losses in the greenback could be limited as the end of quantitative easing boosts the dollar,” said Kathy Lien at GFT.
The Fed was also expected to confirm it will continue to reinvest principal payments from mortgage holdings into longer-term Treasury securities.
Eventually, it will have to withdraw the record stimulus to prevent a potential inflation spiral that would violate its mandate of maintaining price stability.
The only news on the US economic calendar Tuesday highlighted the challenges facing policymakers trying to boost sustainable growth.
Sales of previously-owned US homes fell 3.80 percent in May to a six-month low amid persistent financing problems in the depressed sector, the National Association of Realtors said.
The weak housing sector has been a “big reason” for the sluggish US economic recovery, Bernanke said in early June, a position echoed by analysts.
“The recovery will have to proceed without the help of housing, which is going to make it more difficult to really ramp up growth for any extended period of time,” said Joel Naroff of Naroff Economic Advisors.
“The Fed understands that job growth will not be robust, which is just another reason that Mr Bernanke wants to keep the pedal to the metal as long as possible.”
Nearly two years after the recession ended, economic growth, as Bernanke said recently, is “desperately slow.”
First-quarter growth decelerated to a weak 1.8 percent annual rate, and economists have been lowering their second-quarter forecasts following a string of weak economic indicators.
“Since the FOMC last met on 26-27 April, the unemployment rate has bumped up from 8.8 percent in March to 9.1 percent in May, the S&P 500 index has declined more than 5.0 percent, and consensus growth forecasts for Q2 (second quarter) have been revised down,” said Nomura economists.