US Fed signals more stimulus unlikely

Federal Reserve officials signalled they’re unlikely to expand a $600-billion bond purchase plan as the recovery picks up steam and the threat that inflation will fall too low begins to wane.

The economy is on a “firmer footing, and overall conditions in the labour market appear to be improving gradually,” the Federal Open Market Committee (FOMC) said in a statement yesterday after a one-day meeting in Washington. While commodity prices have “risen significantly,” inflation expectations have “remained stable.”

US equities pared losses as Fed policy makers looked past threats to growth such as higher oil prices, unrest in West Asia and the earthquakes in Japan. Their statement reveals confidence that the plan to buy Treasury securities through June will be enough to achieve the self-sustaining expansion that they say is vital before reversing record stimulus, said analysts including Josh Feinman, global chief economist for DB Advisors, a unit of Deutsche Bank.

“The hurdle for them doing more on the asset purchase program is pretty high,” said Feinman, whose New York-based firm manages $231 billion in assets. “It’s not like they say things are booming, but you don’t need a rip-roaring boom to end the asset purchase programme.”

The Standard & Poor’s 500 Index fell 1.1 per cent to 1,281.87 in New York trading while 10-year Treasury yields declined 0.05 percentage points to 3.30 per cent.

Too slow
Chairman Ben S Bernanke and his Fed colleagues removed language from their January statement which said that the recovery is “disappointingly slow” and that “tight credit” is holding back consumer spending. They also dropped references to “modest income growth” and “lower housing wealth”.

“Certainly, this is the most optimistic Fed officials have sounded since asset purchases began in November and, at a minimum, that’s consistent with the expectation there will be no third round of purchases,” said Jim O’Sullivan, chief economist at MF Global in New York.

Even so, the statement echoed caution from the January release, saying that “the unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate” for stable prices and maximum employment. Policy makers also said they’ll “pay close attention” to inflation trends.

‘Easy policy’
“Inflation is rising and they are running an easy policy,” said Julia Coronado, North America chief economist at BNP Paribas in New York. “They are betting their credibility that inflation expectations won’t become unhinged. They had to balance that against global developments taking the wind out of sails.”

The Fed left its benchmark interest rate in a range of zero to 0.25 per cent, where it’s been since December 2008, and retained a pledge in place since March 2009 to keep it “exceptionally low” for an “extended period.” Officials next meet April 26-27 in Washington.

The average US retail price of regular unleaded gasoline rose to $3.56 a gallon this week, the highest since October 2008.

Preferred price gauge
The Fed’s preferred price gauge, which excludes food and fuel, rose 0.8 per cent in January from a year earlier, matching December’s year-over-year gain, the lowest in five decades of record-keeping. Fed officials aim for long-run overall inflation of 1.6 per cent to 2 per cent.

Payrolls have increased by an average 134,000 a month for the past five months and the unemployment rate has dropped by almost 1 percentage point over three months to 8.9 per cent in February, the lowest since April 2009.

“They were buoyed by the last employment report,” said Mark Gertler, a New York University professor who has co-written research with Bernanke. “Except for what is going on in Japan, and that is a big exception, all the pieces were coming together. The last missing piece of the puzzle was the employment number.”

Among the companies anticipating an improving economy is Pleasanton, California-based Safeway. The fourth-largest US supermarket chain by stores expects that 2011, “while it will be a challenging year,” will be “much better” than 2009 or 2010, CEO Steven Burd said on March 8. “The economy will improve, but only moderately,” Burd said at the company’s investor conference. “We’re not looking for any kind of a hockey-stick curve here.”