No fireworks or policy shift expected as Fed meets

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WASHINGTON, D.C.: The Federal Reserve is expected to keep its monetary stance unchanged as it starts a two-day policy meeting Tuesday, with all eyes on how the US economy exits its winter freeze.

Fed Chair Janet Yellen and other members of the Federal Open Market Committee (FOMC) have said they are fairly sure that the economy’s winter slowdown was mainly due to extremely harsh weather.

But with housing industry data showing a stall in the four months to March, and job creation data still not particularly strong, analysts expect the FOMC to maintain its very dovish stance: seeing no threat of inflation, the policy makers will stick to the forecast of an ultra-low interest rate policy through next year.

Indeed, after significantly reshaping the Fed’s messaging and policy targets in its March meeting, Yellen is expected to let existing policy settle in and watch where the economy goes in the spring thaw.


There will be no fresh Fed forecast data and no public comments by Yellen, who stirred up markets by misspeaking on the timeline for a possible interest rate hike in 2015.

The two-day FOMC meeting “is not expected to produce the fireworks that followed the March deliberations,” said Steven Ricchiuto, economist at Mizuho Securities.

After the March gaffe, he said, Fed policy makers this time are “on notice that the markets are apt to overreact to even the smallest change in the perceived policy path.”

The one key action expected will be another step in the drawdown of the bond-buying stimulus program, cutting it by another $10 billion a month.

The Fed embarked in December on slowly winding up its “quantitative easing” operations, in place in one form or another since 2008 to hold down long-term interest rates.

Since December the program has shrunk from $85 billion a month to $55 billion now, and the expected decision Wednesday will take it to $45 billion.

Economy’s underlying strength
That would signal that, despite a clear economic slowdown in the December-February period, the FOMC sees the economy strong enough to sustain a moderate pace of growth with less easy money.

Yellen said in an April 16 speech to the Economic Club of New York that the central bank did not view the winter downturn as representing any material change in growth.

“The unusually harsh winter weather in much of the nation has complicated this judgment, but my FOMC colleagues and I generally believe that a significant part of the recent softness was weather-related,” she said.

But with no inflationary pressure evident, she made clear that the Fed also has no intention of increasing its benchmark federal funds interest rate from the current low 0-0.25 percent level before mid-2015.

With considerable slack in the labor market and unemployment still high at 6.7 percent, the rate needs to stay low to fuel investment and hiring, she said.

The FOMC still sees a return to “normal” employment—5.6 percent or lower—as “more than two years away.”

AFP

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