Business

Monday August 10, 2009

Fed to continue efforts even though economy is healing


WASHINGTON: Even as the US economy seems to be emerging from recession, the Federal Reserve is likely to signal it will maintain extraordinary efforts to spur growth until a recovery takes root, analysts say.

The Federal Open Market Committee meeting tomorrow and on Wednesday is widely expected to keep on hold the ultra low federal funds rates in a range of zero to 0.25% to stimulate lending and prop up economic activity.

The Fed led by chairman Ben Bernanke could make some changes however in its special efforts to pump over one trillion dollars of liquidity into the financial system – which some call “quantitative easing” – that may no longer be needed, say some economists.

“We expect the Fed to sound more confident about the outlook by noting that the economy appears set to grow in the second half of the year,” said Dean Maki, economist at Barclays Capital, who argues that the latest reports support the view “that the US recession ended in June.”

“In light of this, we do not expect it to expand its US$300bil Treasury (bond) buying programme, which is set to be completed in mid-September.”

Other analysts note that the Fed has a delicate task of keeping inflation expectations in check while instilling confidence in the recovery without creating any new bubbles.

“They probably don’t want to be too pessimistic,” said Cary Leahey, senior economist at Decision Economics. “But they want to temper the enthusiasm of the market” about economic recovery.

The latest economic figures show an economy that is still falling but narrowing its decline. Gross domestic product fell at a 1% pace in the second quarter, after a 6.4% plunge in the January-March period.

Even unemployment, the weak link in the economy, showed signs of improving.

The unemployment rate fell one-tenth of a point to 9.4% in July as job losses narrowed to 247,000 from 443,000 in June.

“The payrolls report hints that the worst of the labour market crunch is over,” said Krishen Rangasamy at CIBC World Markets.

“But, while the US economy will see some growth in the second half of the year, growth will be too mild to put a significant dent in the unemployment rate, which should continue to creep higher.”

Few economists expect the Fed to make any change to interest rates until early 2010, or if employment starts to grow. But the central bank is also likely to take pains to show it has an “exit strategy” in place when needed.

Eugenio Aleman, senior economist at Wells Fargo, said the Fed may have to be ready to hike rates once the economy shows it is recovering on its own without artificial support of the central bank and various stimulus programmes.

“I think they will stay put on rates, but the risks of not doing anything are going to increase, especially if we start to see an increase in commodity prices,” Aleman said.

“If we see a recovery in the rest of the world, the Fed will have to make a difficult choice.” – AFP


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