Fed grows more optimistic about state of economy


THE US Federal Reserve kept policy on hold and gave a more optimistic outlook for the economy, in a statement that gave no hint that further monetary easing was on its way.

In the crucial line of its regular post-meeting statement released yesterday, the rate­setting Federal Open Market Committee upgraded its expectation for the pace of growth in coming quarters to “moderate” – stronger than the “modest” speed it expected in January.

The limited changes to the statement suggest the central bank wants more evidence on the economy’s momentum before deciding whether to offer more stimulus, most likely via further quantitative easing.

The Fed said that it would continue Operation Twist – its $400 billion effort to push down longer-term interest rates by switching its portfolio into treasuries that have longer to run until maturity – and it still expects interest rates to stay exceptionally low until late 2014 at least.

The one-day meeting in March was widely seen as a warm-up for April and June, both of which will be two-day meetings where the Fed updates its economic forecasts and prepares for the completion of Operation Twist in June. The Fed holds a press conference only after two-day meetings. US equities and the dollar remained buoyant after the committee statement, while government bonds and gold extended their early losses.

US stocks held gains, the dollar hit a fresh 11-month high against the yen and prices for US government bonds slipped after the statement was released.

“They recognise employment is getting better but still has room to improve and inflation may be a little higher . . . but longer term inflation is to remain stable,” said Greg Michalowski, chief currency analyst at FXDD in New York.

Richmond Federal Reserve Bank president Jeffrey Lacker dissented against the decision because he did not expect economic conditions to warrant ultra-low rates until late 2014.

In January, he had dissented against the decision to offer a time frame for the first expected rate hike.

The Fed cut overnight interest rates to near zero in December 2008 and has bought $2.3 trillion in bonds to boost growth.

Financial markets are trying to gauge whether policymakers may take fresh steps to stimulate the economy in coming months.

A quickening in the pace of US jobs growth and a sharp drop in the unemployment rate to 8.3 percent from 9.1 per cent in August has led some analysts to rein in their expectations for a further easing of monetary policy. A report yesterday showed retail sales posted their largest gain in five months in February, the latest data to suggest the economic recovery is on a more solid footing.

Even so, Fed officials are uncertain whether the progress reducing unemployment can be maintained given still-sluggish economic growth, and many economists believe the central bank will launch another round of bond buying later in the year.

Analysts are looking to the Fed’s two-day meetings in April and June for decisions about any new directions for policy.

At both meetings, Bernanke will hold a news conference and officials will make public updated economic and interest rate projections.

Most economists think the economy will expand at about a 2 per cent annual rate in the first quarter.

Fed chairman Ben Bernanke said in January it would normally take a growth pace of between 2 per cent and 2.5 per cent just to hold the jobless rate steady.

While the economic recovery is nearly three years old, officials lament that the United States is still far from full employment.

Although the jobless rate has fallen significantly over the last six months, it remains stubbornly high.– Copyright The Financial Times Ltd – (additional reporting Reuters)