Fed expected to keep policy on hold
Despite signs of revival in the housing sector and a lower jobless
rate, a cautious US Federal Reserve is expected to keep its stimulus
programmes in place at its policy meeting.
Six weeks after breaking out a new bond-buying program labeled QE3 to
shore up the economy, analysts see little reason to expect the Fed's
policy board, the Federal Open Market Committee, to reverse direction in
its session on Tuesday and Wednesday.
The signs of recovery remain too feeble, and the overhanging risks
too many -- the US election on November 6 and the "fiscal cliff" crunch,
the eurozone crisis and China's slowdown -- to justify a policy change.
"The recent upturn in economic activity is not enough to force the
Fed's hand to change now. It is far too soon for the Fed to react and
will more likely reaffirm their commitment to QE3," said Chris Low at
FTN Financial.
"After all, the economy is still adding fewer than 150,000 jobs a
month, not enough to cover demographic changes or meet (Fed chairman
Ben) Bernanke's goals," Low said.
At their last meeting, the Fed launched QE3 -- a "quantitative
easing" operation of buying in $40 billion worth of bonds monthly to
press long-term interest rates lower -- with the express aim of sparking
companies to invest and hire.
Bernanke's concern over the slow pace of job creation has mounted
over the past year and by the September 12-13 FOMC meeting, most of the
members of the policy board had gotten in line behind him.
Likewise, his view that inflation is not a threat that requires more
caution about stimulus has also been endorsed by the committee members.
That has not likely changed in the weeks since then, despite a
surprise 0.3 percentage point fall in the national unemployment rate in
September, to 7.8 percent -- the lowest level since January 2009. While
the baseline number looked good, other figures -- the overall number of
unemployed, and those who dropped out of the workforce -- indicated that
the US economy's jobs machine remains week.
Since then other data has been mixed: consumer spending seems
stronger and consumer sentiment is higher, but industrial production has
weakened and exports are down.
The Fed's Beige Book survey of regional economies released October 10
recognized only a modest pickup in activity since August.
But that could be enough to change the tenor of the Fed's
discussions, from one of mulling how to deal with a deteriorating
economy to one of how to anticipate a potential breakout.
The Fed still has to assess the two targets of its interest rate
policy: its mandates of managing inflation and keeping unemployment
down.
Compared to last year, says Narayana Kocherlakota, head of the Fed's
Minneapolis branch, the worry about inflation among FOMC members has
mostly disappeared, despite its key interest rate still being held at
next to zero.
"The terms 'hawkish' and 'dovish' presume that the committee faces a
tension between its two mandates," he said in an October 10 speech.
"But the committee does not see any tension between its two mandates
now. And its long-run unemployment forecasts suggest that it does not
anticipate any tension between the two mandates until the unemployment
rate is considerably lower." Indeed, in the September meeting, Bernanke
made clear that the low rate policy will remain in place until there is
a substantial improvement in the country's employment situation.
The FOMC is expected then to talk more about how it will signal its
views and intentions -- whether, for instance, to set a specific goal
for the unemployment rate, at which it might increase interest rates.
AFP
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