No policy changes are expected as Fed ends meeting
WASHINGTON (AP) — The Federal Reserve is widely expected Wednesday to stick with its aggressive efforts to strengthen a still-subpar economy.
The Fed will likely end a two-day meeting with a statement noting that job growth remains modest and that it’s standing by its campaign to keep loan rates at record lows to help ease unemployment.
The central bank’s efforts include buying $85 billion a month in Treasurys and mortgage bonds to try to keep long-term borrowing costs down.
Investors will have only the Fed’s brief statement to study for clues to its thinking. This isn’t one of the four policy meetings each year that are capped by a news conference by Chairman Ben Bernanke.
Besides buying bonds to keep long-term rates down, the Fed has said it plans to keep its key short-term rate near zero at least until the unemployment rate dips below 6.5 percent from its current 7.6 percent. The goal is for consumers and businesses to borrow and spend more to energize the economy.
Many economists had suggested that the Fed might scale back its bond purchases in the second half of 2013 if job growth accelerated. But the jobs report for March was surprisingly weak. And inflation has been running below the Fed’s target rate, allowing it to keep stimulating the economy without igniting price increases.
“I am not looking for any major action from this meeting,” says David Jones, an economist at DMJ Advisors.
The minutes of the Fed’s last meeting in March indicated that some policymakers favored slowing and eventually ending its bond buying — as long as the economy and the job market kept improving. Some feared that keeping rates too low for too long could escalate inflation, fuel speculative asset bubbles or unsettle markets once the Fed has to start raising rates or unloading its record $3 trillion investment portfolio.
Early this month, though, the government said U.S. employers added only 88,000 jobs in March, far below the 220,000 average in the previous four months. Last week, it said the economy grew at an annual rate of 2.5 percent in the January-March quarter — a decent growth rate but one that’s expected to weaken in coming months because of federal spending cuts and higher Social Security taxes.
At the same time, consumer inflation as measured by the gauge the Fed most closely monitors remains well below its 2 percent target. That gauge rose just 1 percent in the 12 months that ended in March.
Many analysts now think the Fed will keep the Fed’s easy-credit policies unchanged, possibly for the rest of the year.
“The government’s fiscal austerity is kicking in and hitting the economy hard,” says Mark Zandi, chief economist at Moody’s Analytics. “I am not looking for any change in Fed policy at this meeting, not with this weak growth and low inflation.”
The Fed’s goal is to keep price changes from hurting the economy. This could occur if inflation raged out of control or if the opposite problem — deflation — emerged. Deflation is a prolonged drop in wages, prices and the value of assets like stocks and houses.
The United States last suffered serious deflation during the Great Depression of the 1930s but Fed policymakers worry more about the threat of deflation any time prices go lower than 2 percent. They want to avoid following the path of Japan, which has struggled with weak growth and deflation for more than two decades.
Economists believe the latest economic data will embolden the majority of officials who back Bernanke’s commitment to keep borrowing rates down until the economy shows sustained improvement — as long as inflation stays low.
Brian Bethune, an economics professor at Gordon College in Wenham, Mass., says the Fed needs to be especially cautious in signaling any policy shift because the U.S. economy has been serving as a global engine of growth. Many European countries are still struggling to escape a recession that followed the region’s debt crisis.
“Anything the Fed did that could disrupt things or create uncertainty could tip the whole global economy back into recession,” Bethune says.
Few expect the central bank to start raising short-term rates before late 2015 or early 2016. And many economists think the Fed will keep buying $85 billion in bonds each month for the rest of this year, before starting to curtail its purchases in early 2014.