US Fed set to gingerly lift foot off stimulus pedal

The Federal Reserve © AFP/File Karen Bleier

AFP

WASHINGTON (AFP) – The Federal Reserve appears ready to ease off the stimulus pedal that is pumping life into the US economy at a key meeting that opens Tuesday, despite signs of slowing growth.

Most economists expect the Federal Open Market Committee will signal the Fed’s $600 billion asset purchase program will end as scheduled by June 30.

And few expect the quantitative easing, dubbed QE2, will be followed by additional stimulus.

The aim of the FOMC program to buy Treasury bonds announced in November was to lower as much as possible medium- and long-term interest rates at a time when the Fed has run out of firepower.

The central bank slashed its key target to between zero and 0.25 percent two and a half years ago, helping to keep short-term rates low.

The Treasury bond purchases, or quantitative easing, dubbed QE2, are set to end on June 30.

FOMC watchers are anxiously awaiting to see if the Fed’s language in its directive changes at all knowing that QE2 is set to expire, Patrick O’Hare at Briefing.com said.

“There is a burgeoning belief that the Fed will find a new way to communicate that interest rates will stay down longer than is already expected,” he said.

“Either way, this FOMC meeting has added importance given its timing in relation to the Greek situation, the unsettled debate in the US on raising the debt ceiling, and the soft economic data of late,” he added.

Nearly two years after the recession ended, economic growth, as Fed chairman Ben Bernanke said recently, is “desperately slow.”

In the first quarter, soaring oil prices squeezed economic output to a weak 1.8 percent annual rate.

In the ongoing second quarter, high commodity prices and the negative impact on production supplies from Japan’s March earthquake and tsunami, particularly in the auto and electronics sectors, have hit growth.

The FOMC is expected to confirm, at the conclusion of its meeting Wednesday, that the central bank will continue to reinvest principal payments from mortgage holdings into longer-term Treasury securities.

That would allow the Fed to extend its drip feed of support to the ailing economy. Bernanke, in a speech to Atlanta bankers on June 7, signaled the constant infusion would not be cut off any time soon.

The FOMC is to release its policy statement at 1630 GMT Wednesday, and will update key 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.

“The policy statement and the committee’s updated economic projections should reflect these developments.”

In total, the Fed will have pumped more than $2.3 trillion into the economy between late 2008 and June 30 by buying securities on the markets.

Eventually it will have to withdraw the record stimulus that could unleash a spiral of inflation that would violate the Fed’s mandate of maintaining price stability.

For the moment, the central bank appears poised to let its stimulus run its course. Bernanke has made it clear that monetary policy has reached its limits.

The Fed chief is to give the second post-FOMC meeting news conference in history, part of an effort to provide greater transparency about policy decisions.

“Bernanke will be questioned on energy prices, the federal deficit, the labor market, and Europe,” said Ryan Sweet at Moody’s Analytics.

“We expect no major announcements. A relatively uneventful press conference will be counted a success by the Fed.”

© AFP — Published at Activist Post with license