Tags: Fed | Stimulus | Policy | Review

Fed Likely to Skip Fresh Stimulus at Policy Review

Tuesday, 13 Dec 2011 07:04 AM

 

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The Federal Reserve is likely to hold off offering the U.S. economy fresh stimulus at a meeting on Tuesday as it weighs encouraging signs on the recovery against risks coming from Europe.

Central bank officials are expected to continue discussions on how they might sharpen their communications to get more traction out of the monetary easing they have already put in place, but observers rate chances of an announcement as low.

Even less likely is the prospect of a new round of bond buying, although many analysts think that will happen eventually too.

"I don't think this meeting lends itself to any major overhaul of policy," said Jacob Oubina, senior U.S. economist for RBC Capital Markets in New York.

The Fed has held overnight interest rates near zero since December 2008 and has bought $2.3 trillion in bonds in a further attempt to stimulate a robust recovery.

Recent reports about the U.S. economy point to some improvement. The jobless rate tumbled 0.4 percentage point to 8.6 percent in November and consumers entered the holiday shopping season with wallets open.

The world's largest economy expanded at a 2.5 percent annual rate in the third quarter, the fastest pace in a year. Forecasters hope growth will top 3 percent in the current quarter.

However, analysts say the recovery's relative strength is partly a snapback from the weakness that followed Japan's natural disasters and high oil prices early in the year.

They caution that a return to more-sluggish growth is likely, particularly as Europe begins to weigh more heavily.

"Growth will slow down in the first half of the year," said Harm Bandholz, chief U.S. economist for UniCredit in New York. "With that comes weaker payroll gains and a higher unemployment rate."

BIDING THEIR TIME

The large decline in the jobless rate suggests it may have been an anomaly. With U.S. housing markets still deeply depressed and consumers laboring under high levels of debt, two traditional avenues of recovery — home buying and borrowing — are unlikely to provide help this time.

Meanwhile, Europe looms large.

U.S. policymakers say the greatest risk to the U.S. recovery would be financial contagion that could freeze markets in a repeat of the 2008 crisis. Even if that risk is avoided, a likely euro zone recession will take a toll.

Given the uncertainty, the U.S. central bank appears ready to hold both communications and easing tools at the ready for possible use in early 2012.

"We ... continue to face significant downside risks, mostly related to the stress in the euro zone," New York Federal Reserve Bank President William Dudley said last month.

Many observers expect the Fed to begin publishing the interest rate forecasts of its senior officials, perhaps as soon as January, when it issues its next quarterly economic projections.

Doing so would clarify when officials expect benchmark short-term rates to start rising and could cement market expectations that any tightening of policy is a long way off.

The Fed has also been discussing the possible adoption of an explicit inflation target to reassure markets it will not let price pressures gain an upper hand even as it pushes hard to jump-start a stronger recovery.

Many analysts expect the Fed will wait until a two-day meeting on Jan. 24-25 before launching any new initiatives.

Officials are already scheduled to release projections for GDP growth, unemployment and inflation at that meeting, and Fed Chairman Ben Bernanke will hold a quarterly news conference, which he could use to explain any changes.

Markets do expect the Fed to eventually fire more bullets. In a Reuters poll earlier this month, economists at 13 of the 20 financial firms that deal directly with the Fed said they expect the central bank to buy more mortgage-backed securities. The median estimate of the bond-buying initiative was $550 billion.

Of the economists polled, 17 of 20 expect the Fed to overhaul its communications framework.

© 2014 Thomson/Reuters. All rights reserved.

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