Fed Keeps Easing as Economic Recovery on Firmer Footing

Wednesday, 16 Mar 2011 12:00 AM

 

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The Federal Reserve offered its most optimistic view of the U.S. economy since the recession ended, even as Japan's nuclear crisis stoked new worries around the globe.

The economic recovery is on "firmer footing" and the jobs market is "improving gradually," the Fed declared in its statement released at the conclusion of its meeting Tuesday.

That's a more upbeat tone from its previous meeting on Jan. 26, when Fed policymakers said the rate of economic activity was "insufficient" to bring about "significant improvement" in the job market.

The Fed also downplayed inflation risks. And it dropped the phrase "disappointingly slow" in describing the progress made lowering the nation's unemployment rate. That's a reflection of a nearly full percentage point drop in just three months — the sharpest decline in unemployment since 1983.

The Fed on Tuesday, in a unanimous decision, said it was maintaining the pace of its $600 billion Treasury bond-purchase program to help the economy grow more strongly and to lower unemployment, which now stands at 8.9 percent.

The Fed made no mention of Japan's crisis, which caused stocks to plunge earlier in the day. But the more positive outlook from the Fed helped Wall Street recover from a rough start. The Dow Jones industrial average ended the day 137 points down, after falling by as much as 297 points in morning trading.

"Finally, the Fed is giving us a more upbeat outlook. It is not the all-clear signal. But the Fed is much more positive in terms of the sustainability of the economic recovery going forward," said economist Chris Rupkey at Bank of Tokyo-Mitsubishi UFJ.

Rupkey and other economists viewed that as signal that the Fed won't embark on a third round of stimulative bond buying when the current program ends in June.

The Fed's bond-buying program would help the U.S. economy withstand widening economic risks from home and abroad. It is intended to lower loan rates and boost stock prices. Those forces should spur Americans to spend more and companies to hire more.

The Fed said higher prices for energy and other commodities are increasing inflation. But it predicted that the pickup in prices will be "transitory." That's consistent with the assessment Fed Chairman Ben Bernanke gave to Congress earlier this month. The Fed said it will keep close tabs on inflation trends.

Despite the Fed's more optimistic outlook, the list of potential risks to the economy has grown since the Fed's last meeting.

Japan is the world's third-largest economy, so the earthquake and ensuing nuclear crisis there are certain to affect the global economy.

Oil price have spiked since January, rising as investors worry that unrest in the Middle East and Africa could hurt global supply. Oil prices have dipped in recent days and are now hovering around $97 a barrel. Still, gasoline prices have stayed high and now average $3.57 a gallon nationwide.

Investors also are concerned that Europe's debt crisis could linger.

For the United States, the threats have the potential to slow the U.S. economy, or stoke inflation. Or both.

Higher energy prices have some economists lowering their growth forecasts for the first three months of the year. They said high energy prices will slow consumer spending, which accounts for 70 percent of economic activity. JPMorgan Chase now predicts growth in the January-March quarter of just 2.5 percent, down from 3.5 percent.

The Fed, however, observed that consumers are increasing the amount they spend. And Fed dropped concerns made after previous meetings that high unemployment, hard to get loans and depressed home values could restrain the pace of consumer spending.

"This is a significant acknowledgment that the American consumer is back in action, providing additional support to the expansion," said economist Sal Guatieri at BMO Capital Markets.

Tax cuts are giving Americans more money to spend. Retail sales grew for the eighth straight month in February. Businesses are hiring more.

Economists expect the Fed will spend the full $600 billion and won't extend the bond-buying program beyond its June end date.

However, economists aren't expecting the Fed to rush and start boosting interest rates any time soon.

The Fed on Tuesday maintained a pledge to hold its key rate at a record low near zero for an "extended period."

However, some economists believe the Fed could drop that pledge as soon as its next meeting in late April.

But that wouldn't signal an imminent rate increase.

Many economists don't think the Fed will start raising rate until early next year. Others think it will be at the end of 2012.

The central bank's key rate has been at a record low since December 2008. An increase in that rate would boost lending rates charged to consumers. These include rates on certain credit cards, home equity loans and some adjustable-rate mortgages.

Bernanke, however, has said the economic recovery must be deeply rooted before the Fed moves to tighten credit.

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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