Wednesday June 24, 07:51 AM
Fed seeks to steer economy amid signs of recovery
By Rob Lever
WASHINGTON (AFP) - The Federal Reserve is set to conclude a two-day meeting seeking to steer monetary policy amid tentative signs of recovery from the economy's prolonged recession.
Economists expect the Federal Open Market Committee to maintain its near-zero interest rate policy and to reaffirm a commitment to keep pumping money into the economy to battle recession.
The panel led by chairman Ben Bernanke was due to release its statement at the end of the meeting Wednesday around 1815 GMT.
Analysts say that although no change in policy is expected, the Fed statement will be critical to the central bank view on the recovery and when it may end its vast stimulative effort some call "quantitative easing."
"Supporting a weak economy and addressing concerns over the expansion of the Fed balance sheet will form the core of the upcoming FOMC monetary statement," said Joseph Brusuelas, a director at Moody's Economy.com.
While a change in the benchmark federal funds rate is unlikely, traders are expected to pay close attention to the after meeting communique for clues on the unconventional quantitative easing program and inflation, said Mike Schwager, market strategist at Claymore Securities.
"The market seems to be growing fearful that the Fed doesn't have an exit strategy in place -- removing the liquidity from the market to temper inflation -- while not acting too soon to squash the still fragile recovery," Schwager said.
"One potential solution that seems to be evolving in the market would be for the Fed to move from the current federal funds rate range of zero to 0.25 percent to single point of 0.25 percent."
The Fed's job has been complicated by a jump in yields on the bond market, which influences other rates including mortgages that the Fed cannot directly control.
This reflects some renewed fears of inflation once a recovery takes root, but the higher rates could put the brakes on a recovery, say some analysts, who are pricing in a Fed rate hike by the end of this year.
"The Fed knows it must implement a correct monetary policy and on top of that it might have to take some steps to salve the bond market," said Robert Brusca at FAO Economics.
"Ironically the Fed may have to raise the Fed funds rate before it wants in order to keep long term rates in check if the bond market is spooked by stronger than expected growth in the economy. That is a major complication."
Dean Maki at Barclays Capital said that based on stimulus efforts including the recently passed "cash for clunkers" measure to spur auto sales, the economy could grow at a relatively strong pace of 2.5 percent in the third quarter and 3.5 percent in the fourth quarter after steep declines. But he said the Fed will remain stimulative.
"We are not changing our Fed call in response to this economic forecast change; we continue to expect the federal funds rate to be unchanged through 2010," he said.
"We project the unemployment rate to rise further this year and to drift down only gradually, remaining above 9.0 percent throughout 2010. With this much slack in the economy, we think the Fed will keep rates on hold unless the rebound is more vigorous than we project."
Cary Leahey, senior economist at Decision Economics, said that by tradition "the Fed doesn't tighten credit until the unemployment rate peaks, and that won't happen until 2010, so I think the bond market is way ahead of the Fed."
The Fed has already embarked on a massive program to purchase up to 1.2 trillion dollars in government and agency debt in an effort to bring down a variety of interest rates it does not control.
Bernanke calls the effort "credit easing" while others call it "quantitative easing." It is aimed at lifting the economy out of its worst crisis in decades.
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