US Fed expected to leave key policy unchanged
WASHINGTON (AP) -- The Federal Reserve, after employing a dwindling set of policy options at its last two meetings, may hit the pause button in hopes that the faint signs of the economy’s rebound will grow stronger.
By taking a wait-and-see approach, the Fed would be buying time to assess whether its actions in August and September are having the desired effect of lowering long-term interest rates enough to jump-start growth.
The Fed’s decision will be announced around mid-day Wednesday following two days of closed-door discussions.
The central bank will also release an updated economic forecast and Federal Reserve chairman Ben Bernanke will hold a news conference to discuss the Fed’s new forecast.
It will be Bernanke’s third news conference after a Fed meeting and will continue a practice he began last April in an effort to give the public a better understanding of the Fed’s decision-making.
Most economists believe the Fed will leave policy unchanged, although it will be a close call.
“It is about 50-50 on whether they will do anything. There is evidence the economy is continuing to grow, but we still have a fundamentally weak economy,” said Brian Bethune, economics professor at Amherst College.
Financial markets in the United States and around the world were jolted Tuesday after Greece’s prime minister made the surprise decision to call a referendum on the country’s latest rescue package. The move sparked fears that the entire debt deal could unravel, that Greece could default on its debt and that the crisis could ripple through the global financial system.
Economists said Europe was sure to be a major discussion topic during the Fed meeting.
“They will talk about Europe, but I don’t expect any action,” said David Jones, head of DMJ Advisors, a Denver-based consulting group. “The Fed will not respond to the problems in Europe until it is clear they are causing a significant weakening in economic activity in the United States.”
David Wyss, former chief economist at Standard & Poor’s, said one reason for the Fed’s reluctance to do more is that they don’t have many policy options left.
“They know they are running out of tools so they don’t want to employ another one unless they have to,” he said.
The economy nearly stalled out during the first six months of the year, with growth slowing to an anemic 0.9 percent, the slowest pace since the recession ended in June 2009.
However, the government reported last week that growth rebounded modestly in the summer with the economy expanding at an annual rate of 2.5 percent in the July-September period, the best quarterly performance in a year.
While the economy would have to nearly double from the 2.5 percent rate to make a significant dent in high unemployment, the faster growth at least eases fears of a new recession.
At its Aug. 9 meeting, the central bank approved changing its guidance on future policy to say it hoped to keep a key interest rate, which has been near zero since December 2008, at a record low through at least mid-2013, as long as inflation does not become a threat.
The belief was that such an assurance would give investors more confidence that rates would not begin rising any time soon and help to push long-term rates down farther.
At the next meeting on Sept. 20-21, the Fed voted to shift $400 billion of its holdings from short-term to long-term Treasury securities in another effort to push already low long-term rates down further. These rates are critical for consumers borrowing to buy homes and cars and for businesses borrowing to make investments to expand their operations.
Both the August and September moves were approved on 7-3 votes with three regional bank presidents -- Richard Fisher of Dallas, Charles Plosser of Philadelphia and Narayana Kocherlakota of Minneapolis -- voting no because of concerns the actions raise the threat of future inflation.
That was the largest number of dissents in nearly 20 years from an action by the Federal Open Market Committee, the panel of Fed governors and central bank presidents who meet eight times a year to set interest-rate policies.
On the other side are at least four Fed officials, Vice Chair Janet Yellen, Governor Daniell Tarullo, Chicago Fed President Charles Evans and New York Fed President William Dudley who have expressed concerns that the economy is still at risk and may need more support.
If the Fed does move again, many believe it will not occur until either the December meeting or early next year. Some economists believe the likely next change would be a further tweaking of the Fed’s communication efforts.
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