US Fed to meet as global crises loom large

The US Federal Reserve building
© AFP/File Karen Bleier

WASHINGTON (AFP) – The Federal Reserve’s top policymakers meet Tuesday with an upbeat US economic outlook clouded by a devastating earthquake and tsunami in Japan and unrest in the Middle East.

The Fed’s rate-setting panel is expected to keep stimulus policies in place — including ultra-low interest rates — even as unemployment eases, consumer spending picks up and businesses grow more optimistic.

“We anticipate a more upbeat assessment of the economy and a less pessimistic tone towards the labor market,” said Fabio Fois of Barclays Capital.

The Fed is expected to continue to unfurl a $600 billion stimulus spending designed to jolt the US economy back to full health, but one which critics warn is a risky gambit that is stoking inflation.

The Fed is expected to wave off concerns about rising prices, which have only been fueled by fighting in Libya that has pushed up the cost of oil.

With Americans struggling to pay gasoline prices that have risen around 43 cents a gallon (3.8 liters) in the last month to an average of $3.54, the Fed has insisted that core inflation remains in check.

The Fed’s measure of inflation ignores volatile food and energy prices, which are often the costs most keenly felt by consumers.

On Friday the head of the powerful New York Federal Reserve, William Dudley, said inflation levels remained well below the two percent rate which the bank says spells a healthy economy.

“Inflation expectations are well-anchored today and we intend to keep it that way,” Dudley said.

But as the economy improves, pressure is building on the Fed to ease its stance.

The central bank “will have to change its inflation language,” John Ryding and Conrad DeQuadros of RDQ Economics said in a client note.

“Core inflation has stabilized and picked up slightly, oil and commodity prices have increased significantly, and inflation expectations have risen.”

“The Fed, we believe, is on the wrong side of the inflation story.”

But events in Japan may have eased pressure on the Fed to reverse course.

The economic impact of a massive earthquake and tsunami in Japan — the world’s third-largest economy — is still unknown, although few believe a serious spillover is likely.

“Our early assessment is that Japan’s GDP will take a hit for a quarter or two, but then bounce back as reconstruction gets into gear,” said Patrick Newport of IHS Global Insight.

But coupled with rekindled sovereign debt crisis in Europe that saw Spain and Greece’s sovereign ratings downgraded in the past week, and rising oil prices, the potential exists for an external brake on US growth.

Against this backdrop the Fed is expected to stand pat.

“The economic outlook has improved considerably in the past six months,” according to Dudley that was the aim of the Fed’s strategy “this is welcome and not a reason to reverse course.”

But some experts believe the Fed might soon do just that.

“This is likely to be the last gathering before the Fed has to begin prepping the markets for the end of QE2,” said Stephen Stanley of Pierpont Securities using the jargon name for the Fed’s easy monetary policy — quantitative easing.