U.S. FEDERAL RESERVE STRUGGLES TO REVIVE ECON GROWTH
Posted by Gilmour Poincaree on January 28, 2009
Thursday, January 29, 2009
WASHINGTON, D.C.: The US Federal Reserve wraps up a two-day policy meeting Wednesday focused on new tools to revive a moribund economy that has so far failed to respond to its zero-interest rate policy.
The Federal Open Market Committee (FOMC) meeting was being held six weeks after the central bank slashed its base-lending rate to a range of zero to 0.25 percent and predicted “exceptionally low” rates to persist.
An announcement was due around 1915 GMT Wednesday.
Joseph Balestrino at Federated Investors said he expected some clues from the Fed on additional efforts to get credit flowing in the economy.
“There’s not much more the central bank can do on the monetary policy front after having lowered its target federal funds rate to a record low,” he said.
“What may be worth noting is the language the Fed uses to describe the state of an economy that, since the two-day meeting that ended December 16, appears to have worsened on most every front.”
Balestrino said Fed chairman Ben Bernanke and his colleagues “are likely to be more explicit about their plans for quantitative easing—that is, using measures such as direct injections into banks and purchases of debt securities to pump more capital into ailing institutions and the markets.”
Sacha Tihanyi, analyst at Scotia Capital, said the market expects the Fed to take further action to help fire up growth.
“With rates going nowhere for some time, the market’s focus will be on whether the Fed will be looking to buy government—or corporate—securities in the near future,” Tihanyi said.
“This is a highly controversial step and some see this as somewhat of a high-risk policy but on the other hand, it is one of the few avenues the Fed has left open to it with regard to further easing monetary conditions.”
Despite the zero-rate policy, Bernanke and others have repeatedly said the central bank is not out of ammunition to fight the crisis. But Bernanke avoided the use of the term “quantitative easing,” saying the Fed has engaged in what he called “credit easing” to spur more lending activity.
The Fed “has already done a lot and will continue to do a lot” in addition to moving on interest rates, said Nariman Behravesh, chief economist at IHS Global Insight.
The central bank has already offered exceptional aid to banks and other firms, and has been buying up mortgage-backed bonds and commercial paper to help unfreeze credit in those areas.
Analysts say this has helped somewhat but that credit markets remain under stress, with lenders and consumers skittish about taking on new risks.
Morgan Stanley economist Ted Wieseman said he expected nothing dramatic from the Fed meeting.
“Obviously rates have already been cut about as low as they can go,” he said.
“If long-end [Treasury bond] yields continue surging higher, the Fed will undoubtedly eventually step in and start buying, but such an announcement probably wouldn’t come in an FOMC statement.”
Economist Joseph LaVorgna at Deutsche Bank said the Fed might not yet be ready for direct purchases of US Treasuries.
“Even though we believe the Fed will eventually be forced to purchase Treasuries in an attempt to cap their yields we do not believe the Fed is going to announce those intentions today,” he said.
He said some members might be uncomfortable with what could be seen as a drastic step.
“Rather, we expect the Fed to repeat the ‘committee is evaluating the potential benefits of purchasing longer-term Treasury securities.’”
Scott Brown, chief economist at Raymond James & Associates, said each word of the Fed statement would be weighed and parsed carefully.
“The wording of the policy statement will signal future intentions,” he said.
“In each statement, the Fed describes its economic outlook. A darkening in that outlook would likely mean that further stimulus efforts are coming. A brighter outlook would suggest that policy will become less accommodative.”