FILE - In a Feb. 17, 2011 file photo Federal Reserve Chairman Ben Bernanke testifies on Capitol Hill in Washington, before the Senate Banking Committee. Federal Reserve policymakers will meet Tuesday March 13, 2012 in Washington. (AP Photo/J. Scott Applewhite/File)
FILE - In a Feb. 17, 2011 file photo Federal Reserve Chairman Ben Bernanke testifies on Capitol Hill in Washington, before the Senate Banking Committee. Federal Reserve policymakers will meet Tuesday March 13, 2012 in Washington. (AP Photo/J. Scott Applewhite/File)
WASHINGTON (AP) ? Since the Federal Reserve's policymakers last met in January, the job market has shown more muscle. Employers have hired more than a half million people. The unemployment rate is down.
The core issue the policymakers face when they meet Tuesday is whether that burst of strength will last long enough for them to soon scale back their support for the economy.
No major announcements are expected after the Fed's one-day meeting. Private economists think the officials will note the job gains. But they expect them to repeat their plan to keep short-term interest rates at a record low until at least late 2014.
Those low rates are intended to encourage consumers and businesses to borrow and spend more. Lower yields also lead some investors to shift money out of bonds and into stocks.
Despite the brightening prospects for job seekers, unemployment remains historically high at 8.3 percent ? something Federal Reserve Chairman Ben Bernanke mentioned in testimony to Congress last month, when he said, "The job market remains far from normal."
Bernanke also said consumer spending and confidence remain less than healthy, inflation-adjusted pay gains are low and credit is still tight for many. As long as they are, Bernanke suggested, unemployment might not fall much further.
Bernanke's comments and remarks from other Fed officials suggest that the Fed plans to maintain its efforts to keep rates low to fuel growth.
"The Fed has to be encouraged about the economic data they have been seeing," said David Wyss, former chief economist at Standard & Poor's in New York. "But given that unemployment is still 8.3 percent, it is hard to see them taking their foot off the accelerator."
Most economists don't think the Fed will retreat anytime this year from its late-2014 target for any rate increase. Some note that threats to the economy remain from Europe's debt crisis and the run-up in gasoline prices.
Eventually, the Fed will feel compelled to raise rates to curb inflation as the economy heats up. But some analysts think the Fed is reluctant to signal an eventual shift toward higher rates before it's close to a change. Signaling a change too soon might cause investors to push interest rates up before the Fed is sure the economic recovery will last.
"It would be extremely damaging if they changed their message right now," said Brian Bethune, an economics professor at Amherst College. "It would reverberate across financial markets."
Some analysts even think the Fed is prepared to go further to try to strengthen the economy.
Vincent Reinhart, a former top Fed official involved in interest-rate policy, foresees a three-in-four chance that the Fed will announce some new action by June. That's when the Fed's latest program to drive down long-term rates will expire.
Fed policymakers "have consistently pointed to reasons the performance of the economy will be subpar and at significant risk in the near term," Reinhart, now chief U.S. economist for Morgan Stanley, wrote in a research note last week.
Reinhart suggested that the most likely move would be a third round of bond purchases. Two previous rounds have helped expand the Fed's balance sheet to $2.94 trillion ? triple what it was before the financial crisis erupted in 2008. The balance sheet reflects assets the Fed has taken on, such as bonds and mortgage-backed investments.
The Fed's purchases of securities have triggered criticism from some, including Republican presidential candidates. They argue that the central bank is fueling future inflation by steadily pumping more cash through the banking system.
To make the bond purchases, the Fed essentially creates money. It then uses it to buy bonds to try to drive down their yields. The idea is for banks to lend at lower rates.
But critics say the bond purchases have weakened the dollar's value. That makes foreign goods more expensive.
And they say the purchases have forced up the prices of commodities such as oil and heightened the risks of asset bubbles. They note that the housing bubble was fueled by a previous period of prolonged low rates engineered by the Fed.
To address such concerns, Reinhart said the Fed might consider making "sterilized" bond purchases. In doing so, it would buy more long-term bonds ? but borrow the same amount it's spending. The Fed would borrow through short-term loans called repurchase agreements.
This effort would be similar to the Fed's current "Operation Twist" program. Under this program, the Fed is buying $400 billion in long-term bonds while selling a similar amount in short-term holdings. That way, its balance sheet doesn't grow.
The Fed has been forced to use unconventional means to support the economy because its principal tool, the federal funds rate, can't go any lower. The Fed's target for that rate has stayed at a record low between zero and 0.25 percent since December 2008.
Mark Zandi, chief economist at Moody's Analytics, said he thinks the first rate increase will occur in early, rather than late, 2014. But he says the Fed won't likely signal any change in plans for at least another year.
"We are still at least two years away from an actual Fed tightening of interest rates," Zandi said. "A lot can happen between now and then, and I think the Fed is doing exactly the right thing by keeping all of its options on the table."
Associated Pressromney michigan derrick williams railgun jk rowling new book dancing with the stars cast dancing with the stars season 14 between two ferns
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.