Euro crisis poses 'significant risk' for US, says Fed

THE FEDERAL RESERVE last night pointed to turmoil in Europe as a big risk to the US economy, leaving the door open to a further easing of monetary policy, even as it noted some improvement in the US labour market.

The central bank characterised the US economy as expanding moderately despite an apparent slowing in global growth and said while there had been “some” improvement in the job market, unemployment remained elevated and housing depressed.

“Strains in global financial markets continue to pose significant downside risks to the economic outlook,” the Fed said, alluding in a statement after the meeting to pressures stemming from the debt crisis in the euro zone.

Prices for US stocks and government debt pared gains, while the dollar rose against the euro after the announcement.

The Fed’s statement, issued after a one-day meeting, was little changed from the announcement it released after its last gathering in early November, and it touched only lightly on apparent improvements in the economy’s performance.

The Fed offered no new guidance on its evolving communications policy and repeated that it expects inflation to settle at levels at or below those consistent with its price-stability mandate.

For the second time running, Chicago Fed president Charles Evans dissented against holding policy steady, saying he favoured additional easing now. The US central bank has held overnight interest rates near zero since December 2008 and has bought $2.3 trillion (about €1.8 trillion) in government and mortgage-related bonds in a further attempt to stimulate a robust recovery.

Fed officials are divided between those who think high unemployment and sluggish growth demand more action, and those who view the central bank’s already aggressive efforts as bordering dangerously on an invitation to inflation.

Some influential policymakers, including the Fed’s vice-chairwoman, Janet Yellen, have suggested they would be inclined to take additional steps if growth fails to pick up.

Recent data about the US economy point to some improvement. The jobless rate tumbled 0.4 percentage points to 8.6 per cent in November, factory activity has quickened and businesses are restocking depleted shelves.

Consumer spending also appears solid, although on Tuesday a softer-than-expected report on November retail sales offered a hint that it could be flagging.

Many observers say the Fed will step in to take steps to stimulate growth in 2012, first through communications measures that drive home their expectation that interest rates will not rise for a long time, and then through more bond buying. – (Reuters)