US Federal Reserve to meet with eyes on policy forecasts
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US Federal Reserve to meet with eyes on policy forecasts

Last Updated: Tuesday, June 17, 2014, 20:54
 
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US Federal Reserve to meet with eyes on policy forecasts
Wasington: The Federal Reserve should keep US monetary policy unchanged in a two-day meeting beginning Tuesday, but analysts will looks for any hint on changes to the trajectory for interest rates. 

Even if the current policy is locked in place -- keeping the benchmark federal funds rate at zero, and steadily cutting back the now $45 billion a month bond-buying stimulus program -- the Federal Open Market Committee will have much to discuss.

The FOMC has consistently pointed to the middle of 2015 at the earliest for beginning to raise the fed funds rate. 

But that dovish stance is under pressure from two sides. One says inflation is picking up, the jobs market is tightening, and that bubble-like tendencies are showing up in markets due to the prolonged period of easy money.

The other -- voiced notably on Monday by the International Monetary Fund -- says the US economy still faces slow growth over this year and the medium term, that the jobs market is still weak and that unemployment too high. In that case, the Fed can afford to keep rates low for much longer than its current outlook.

"Given the substantial economic slack in the economy, there is a strong case to provide continued policy support," the Fund said in its annual report card on the US economy.

"The economy is expected to reach full employment only by end-2017 and inflationary pressures are expected to remain muted," it said.

"If true, policy rates could afford to stay at zero for longer than the mid-2015 date currently foreseen by markets."

Recent data has been mixed, after the unexpectedly sharp economic contraction of the first quarter. Job growth, a key FOMC policy interest, has picked up, with the jobless rate now down to 6.3 percent, compared with 7.5 percent a year ago.

That fall has taken place faster than the Fed anticipated. But it also represents the fact that millions of people who dropped out of the job market since the 2008 crisis have not returned. The job market participation rate remains very low at 62.8 percent compared with more than 66 percent before the crisis.

The number of long-term unemployed remains high, and wages remain relatively flat, suggesting gains in the jobs market have not substantially tightened conditions.

Yet prices have picked up, with the consumer price index in May up 2.1 percent over a year ago, putting inflation close to the Fed`s target range.

At least, said Jim O`Sullivan, chief US economist at High Frequency Economics, "the (inflation) data will clearly discourage Fed officials from making their forward guidance any more dovish than it is already."The members of the FOMC will update their forecasts for growth, inflation, unemployment and the fed funds rate for the next three years, which when the expectations for a rate hike are averaged could show a slight shift that could move bond markets.

They are also expected to continue a discussion begun in their last meeting on how to manage volatility in short-term interest rates as they exit the period of unconventional policy -- ultra-low rates and high stimulus -- and normalize the Fed`s stance.

Fed Chair Janet Yellen will add depth to the formal FOMC policy statement in a post-meeting press conference Wednesday.

The FOMC meets for the first time with Stanley Fischer, the US-Israeli former head of Israel`s central bank, on board as Fed vice chair; and with a just-confirmed new governor, Lael Brainard, previously the US Treasury`s top official for foreign affairs.



AFP

First Published: Tuesday, June 17, 2014, 20:54


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