Fed signals further stimulus unlikely as recovery strengthens

March 17, 2011 - 0:0

Federal Reserve officials signaled they’re unlikely to expand a $600-billion bond purchase plan as the recovery picks up steam and the threat that inflation will fall too low begins to wane.

The economy is on a “firmer footing, and overall conditions in the labor market appear to be improving gradually,” the Federal Open Market Committee said in a statement yesterday after a one-day meeting in Washington. While commodity prices have “risen significantly,” inflation expectations have “remained stable.”
U.S. equities pared losses as Fed policy makers looked past threats to growth such as higher oil prices, unrest in the Middle East and the earthquakes in Japan. Their statement reveals confidence that the plan to buy Treasury securities through June will be enough to achieve the self-sustaining expansion that they say is vital before reversing record stimulus, said analysts including Josh Feinman, global chief economist for DB Advisors, a unit of Deutsche Bank AG.
“The hurdle for them doing more on the asset purchase program is pretty high,” said Feinman, whose New York-based firm manages $231 billion in assets. “It’s not like they say things are booming, but you don’t need a rip-roaring boom to end the asset purchase program.”
The Standard & Poor’s 500 Index fell 1.1 percent to 1,281.87 in New York trading while 10-year Treasury yields declined 0.05 percentage points to 3.30 percent.
----------Too slow
Chairman Ben S. Bernanke and his Fed colleagues removed language from their January statement which said that the recovery is “disappointingly slow” and that “tight credit” is holding back consumer spending. They also dropped references to “modest income growth” and “lower housing wealth.”
“Certainly, this is the most optimistic Fed officials have sounded since asset purchases began in November and, at a minimum, that’s consistent with the expectation there will be no third round of purchases,” said Jim O’Sullivan, chief economist at MF Global Inc. in New York.
Even so, the statement echoed caution from the January release, saying that “the unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate” for stable prices and maximum employment. Policy makers also said they’ll “pay close attention” to inflation trends.
------------‘Easy policy’
“Inflation is rising and they are running an easy policy,” said Julia Coronado, North America chief economist at BNP Paribas in New York. “They are betting their credibility that inflation expectations won’t become unhinged. They had to balance that against global developments taking the wind out of sails.”
The Fed left its benchmark interest rate in a range of zero to 0.25 percent, where it’s been since December 2008, and retained a pledge in place since March 2009 to keep it “exceptionally low” for an “extended period.” Officials next meet April 26-27 in Washington.
The average U.S. retail price of regular unleaded gasoline rose to $3.56 a gallon this week, the highest since October 2008.
“Commodity prices have risen significantly since the summer, and concerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks,” the Fed said.
-----------Preferred price gauge
The Fed’s preferred price gauge, which excludes food and fuel, rose 0.8 percent in January from a year earlier, matching December’s year-over-year gain, the lowest in five decades of record-keeping. Fed officials aim for long-run overall inflation of 1.6 percent to 2 percent.
Payrolls have increased by an average 134,000 a month for the past five months and the unemployment rate has dropped by almost 1 percentage point over three months to 8.9 percent in February, the lowest since April 2009.
“They were buoyed by the last employment report,” said Mark Gertler, a New York University professor who has co-written research with Bernanke. “Except for what is going on in Japan, and that is a big exception, all the pieces were coming together. The last missing piece of the puzzle was the employment number.”
Among the companies anticipating an improving economy is Pleasanton, California-based Safeway Inc. The fourth-largest U.S. supermarket chain by stores expects that 2011, “while it will be a challenging year,” will be “much better” than 2009 or 2010, Chief Executive Officer Steven Burd said March 8.
“The economy will improve, but only moderately,” Burd said at the company’s investor conference. “We’re not looking for any kind of a hockey-stick curve here.”
------------Unanimous decision
The FOMC decision was unanimous for a second consecutive meeting. That means Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser, both skeptics of the second round of so-called quantitative easing who voted for the statement Wednesday, don’t disagree strongly enough with the path of policy to dissent.
“The next meeting in late April is the last chance they have to bring QE2 to an early halt, and if that was going to happen I’d expect one or two of the more hawkish members to have dissented,” said Brian Levitt, an economist at OppenheimerFunds Inc. in New York, which has $184.4 billion in assets under management as of Feb. 28.
The central bank, through the New York Fed’s traders, has enlarged its balance sheet by $304 billion through its Treasury purchases since Nov. 12. Including securities bought by reinvesting proceeds of maturing mortgage debt the Fed has purchased $426 billion of Treasuries.
----------‘Very cautious’
Atlanta Fed President Dennis Lockhart said in a March 7 speech that he doesn’t expect consumer-price inflation to accelerate because of the rise in food and energy costs. Speaking to economists in Arlington, Virginia, Lockhart said he is “very cautious” about further asset purchases, while not ruling out the possibility because turmoil in the Middle East and Africa risks slowing the U.S. economy.
“They certainly understand what the risks are out there and the risks are greater than they were 60 days ago: from the Middle East and oil prices to Japan and how that could affect financial markets and regional growth,” said Paul Ballew, a former Fed economist and senior vice president at Nationwide Mutual Insurance Co. in Columbus, Ohio. “It’s not a surprise they’re going to keep their powder dry and see how things play out.”
(Source: Bloomberg)