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March 17, 2013 7:16 pm
The US Federal Reserve is set to keep its policy on hold this week as it wrestles with an economy that takes at least one step backwards for every two in the right direction.
Fed officials are encouraged by much of the recent economic data, especially on housing and from the labour market, where 236,000 new jobs in February were matched by new lows in claims for unemployment insurance.
That would point to a more upbeat statement on the economy – were it not for the arrival of $85bn in across-the-board, sequestration cuts to public spending at the start of March. The newly announced tax on depositors in Cyprus means the Fed has further eurozone instability to worry about as well.
In their last round of economic forecasts, made in December, most members of the rate-setting Federal Open Market Committee assumed that sequestration would not take effect.
The likely result on Wednesday is only a modest change to the FOMC statement and a mishmash of updates to its forecasts. Growth projections, currently at 2.7 per cent for 2013, may come down a little. But unemployment forecasts, where the current rate of 7.7 per cent is close to what the Fed had pencilled in for the end of this year, may also move a little lower.
With slow progress on the economy, the main focus will be on what the chairman Ben Bernanke says in his press conference, especially about the Fed’s current $85bn-a-month QE3 programme of quantitative easing and its eventual exit strategy from easy monetary policy.
The FOMC plans to review QE3 at this meeting – and it is likely to repeat the exercise every few months this year – but for now most officials think that the benefits exceed the costs.
Concern about those costs within the Fed has grown since QE3 started last September, but in recent testimony to Congress Mr Bernanke was emphatic about the short term. “To this point we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery,” he said.
On the Fed’s exit strategy – its plan for eventually getting rid of all the assets it is now buying – the idea of letting them gradually mature rather than selling them is gaining ground in the FOMC.
“We could exit without ever having to sell and by letting it run off,” said Mr Bernanke in his testimony. “And we could tighten policy by raising rates that we pay on reserves. That would be one strategy, for example.”
That would smooth out the Fed’s earnings and make it less likely to report a loss during exit. But it is unpopular with members of the FOMC who want the Fed to sell its mortgage-backed securities as soon as possible and get back to holding nothing but Treasuries.
A formal review of exit strategy is likely later in the year but Mr Bernanke’s press conference may show how the balance of opinion at the Fed is moving. Another area of debate for the FOMC is further changes to the presentation of its economic projections – such as giving more detail on which Fed official made which forecast – but they may not be ready at this meeting.
One communications change has already been announced, however, turning the marathon of FOMC day into a middle-distance race. Instead of a long gap between the FOMC statement and Mr Bernanke’s press conference, the statement will come out at 2pm in Washington, followed by Mr Bernanke at 2.30pm.
The FOMC statement will always come out at 2pm from now on, regardless of whether there is a press conference or not.
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