Wednesday, March 14, 2012

Fed meets on economy amid mixed US growth signals

WASHINGTON - The Federal Reserve launched its regular policy review of the US economy Tuesday with signals on growth likely too mixed for it to budge from its easy-money stance.

Although the economy found its legs to pump out an average of 245,000 net new jobs per month between December and February, the central bank's Federal Open Market Committee remains unconvinced about any pickup and is almost certain to keep its ultra-low interest rate in place, analysts say.

"The upturn in much of the data is still not yet sufficiently embedded to prompt anything we could call an impending shift in policy from the FOMC," said Ian Shepherdson of High Frequency Economics.

The FOMC meeting "will allow the Fed to benchmark some of the recent events... and put into context the solid economic data without having to signal much in terms of change in policy," said George Goncalves at Nomura Securities.

Signs of a pickup continue to accumulate, with fresh data Tuesday showing US retail sales growing 1.1 percent in February from January, their highest pace in five months.

That came after Friday's better-than-expected data on the labour market in February; a slowdown in layoffs, rise in consumer borrowing and the strongest pace of car sales since early 2008.

All that, and a pickup in inflation in January, would suggest that the US central bank needs to think about how to keep growth and prices under control.

But Fed chairman Ben Bernanke sees a cloudier picture. He told Congress last month that the economy is still being held back by the thin wallets of American consumers.

"The fundamentals that support spending continue to be weak," he said.

"Real household income and wealth were flat in 2011, and access to credit remained restricted for many potential borrowers. Consumer sentiment, which dropped sharply last summer, has since rebounded but remains relatively low."

The Fed is forecasting that combination will keep overall economic growth at a tepid 2.25 percent this year.

Bernanke's primary worries are the continued slack in the jobs market and housing sector.

In February, the overall unemployment rate held steady at 8.3 percent, and the number of jobless at 12.8 million, despite the strong job creation.

The reason is that, on top of the official jobless numbers are millions who dropped out of the jobs market altogether in the Great Recession.

They are beginning to return, and their presence, it is feared, will keep the unemployment rate stubbornly high, and wage growth flat.

Likewise, despite Fed actions that have pushed home loan rates to record lows, there is a huge surplus of homes held by banks and defaulted homeowners dribbling on to the market, keeping prices at rock bottom and the housing construction industry from regaining strength.

A third source of concern came from the January trade figures released Friday. They showed a big increase in imports -- especially of higher-priced oil -- which is usually a negative for economic growth.

For those reasons economists are taking seriously the Wall Street Journal's report last week that the Fed has developed in reserve a new "QE3" bond-buying programme to boost the US economy that would not add to inflationary pressures.

"They may be more concerned about the economy than we think," said Chris Low of FTN Financial.

View the original article here

Source From Channel News Asia

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