News Analysis: U.S. Fed seen likely to stick with easy monetary policy
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E-mail Xinhua, May 1, 2013
The U.S. Federal Reserve's policy-setting committee on Tuesday began its two-day meeting which will end on Wednesday with a statement. Analysts said with inflation well below target and recent disappointing economic data, the central bank is likely to keep foot on stimulus pedal.
"There are several issues that are likely to be high on the agenda" for the meeting, said David Stockton, a senior fellow at the Peterson Institute for International Economics.
"The first issue will be to discuss how much weight to give the recent string of disappointing economic news - most notably, a small gain in payroll employment, the continuing steep decline in labor force participation, and soft readings on industrial production and from purchasing managers," he added.
The former Fed chief economist said some of the earlier optimism the Fed was feeling about economic developments has receded. Moreover, the very subdued inflation data contributed to suggest that broader inflation pressures are absent in the U.S. economy.
The Fed's favored gauge of inflation - the personal consumption expenditures price index - fell to 1.0 percent on year-over-year basis in March from 1.3 percent in February, according to a report from the U.S. Commerce Department. The Fed had made it clear that it wanted to keep the inflation level at around 2 percent.
A separate GDP report showed that the U.S. economic growth accelerated to an annual rate of 2.5 percent in the first quarter, but not as much as expected.
Stockton expected that the growth will moderate in the middle of the year, largely because of the impact of the tax increases that took place at the beginning of the year and the effects of sequestration. "This slower growth of the economy and the very low rates of price inflation are likely to forestall any tapering of the Fed's asset purchasing program at least until the fall."
As the minutes of the Fed's last policy meeting showed, the Fed officials were divided over how long to keep the bond-buying program and some favored tapering the asset purchasing around mid- year, with the program ending later in 2013. Only two members indicated that purchases might well continue at the current pace at least through the end of the year, the minutes noted.
The Fed last month pledged to continue monetary accommodation by keeping the short-term interest rates at record low and implementing massive asset-purchasing program, dubbed QE.
Since last year, the Fed has been expanding its balance sheet by 85 billion dollars per month in treasury bonds and mortgage- backed securities in an effort to ease the credit environment and spur growth and jobs.
The latest employment report showed that the economy created only 88,000 new jobs in March, far fewer than economists had expected. The jobless rate fell to 7.6 percent, but the labor- force participation rate tumbled to a 34-year low.
The Fed officials have said they would continue the quantitative easing until they see "substantial improvement" in the labor market outlook. They also plan to keep the key short- term interest rate near zero at least until the unemployment rate dips below 6.5 percent from its current 7.6 percent.
"We have a tug-of-war between the improving economy and the current large negative fiscal impulse. How this tug-of-war gets resolved - which force dominates - won't be known for some time. In other words, the level of uncertainty about the near-term outlook in the United States remains quite high," William Dudley, president of the Federal Reserve Bank of New York, said in a recent speech.
James Bullard, president of the Federal Reserve Bank of St. Louis, spoke in New York last week, warning that inflation remained too low and suggesting he would be ready to increase the rate of assets purchases.
He sang a different tune from his earlier interview with CNBC when he said he would be willing to adjust the central bank's massive bond-buying program in "small increments" as economy improved. Endit
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