Sunday April 26, 06:32 AM
Fed to stay aggressive, but prepare for recovery
By Rob Lever
WASHINGTON, (AFP) - The Federal Reserve is likely to maintain its aggressive efforts to lift the US economy out of deep recession but also seek to lay the groundwork for a potential recovery, analysts say.
The Federal Open Market Committee, which opens a two-day meeting on Tuesday, is likely to signal no change in policy since its March gathering, when it added over one trillion dollars to its arsenal to fight the economic crisis.
The FOMC statement due Wednesday is expected to depict a weak economy that still needs extraordinary support, justifying its policy of near-zero interest rates and vast lending facilities to pump up credit availability.
"I don't think the Fed wants to create any excessive optimism," said Adolfo Laurenti, senior economist at Mesirow Financial.
"I think the Fed is encouraged (by recent economic data) but it is too early to announce any turnaround."
Laurenti said the Fed led by chairman Ben Bernanke will be trying to manage expectations as financial markets await the impact of the central bank's massive stimulus effort.
The economist said the Fed must be ready with a plan to end the stimulus when the economy begins to recover, to avert a surge of inflation.
"Now is not the time to withdraw any stimulus," he said.
"At the same time they want to be ready with an exit strategy one year down the road. They do not want a return of inflation in another 12 to 15 months."
After its March 17-18 meeting, the Fed said it would buy 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, who calls the effort "credit easing" instead of quantitative easing, nonetheless acknowledges the effort to effectively print vast amounts of money to help lift the economy out of its worst crisis in decades.
Peter Hooper, economist at Deutsche Bank (Xetra: 514000 - news) , agrees that the Fed must look into the future to keep inflation in check after a recovery.
"Inflation risks remain very much to the upside for the longer term, and we expect that once the Fed does eventually begin to raise rates, it could move them up quickly," he said.
He said financial markets expect rates to move up in early 2010 but that the Fed must tread carefully.
"The Fed may want to go to some pains to avoid what many observers have suggested was a tardy move to tightening during 2003-2004 that helped fuel the housing bubble," he said.
"Weighed against this ... is a desire to avoid tightening too soon and pushing the economy back into recession as has happened in the past as well."
Gary Thayer, senior economist at Wachovia Securities, said the Fed does not want to get too far ahead of the economy or markets.
"We expect them to continue their very easy (money) policies," Thayer said.
"Over the past six months they have said they expect their policies to foster stability and we expect them to acknowledge this at this meeting or the next meeting," he added.
"But it's still a little early because there are a lot of indicators that still need to turn up, especially in housing."
The US economy plummeted at a steep 6.3 percent pace in the fourth quarter of 2008 and it remains unclear whether the bottom has been hit.
The first official estimate for first quarter US output is due Wednesday, hours before the Fed concludes its meeting. Analysts expect gross domestic product to show a decline of 4.9 percent.
"We think the FOMC statement will suggest that the pace of economic contraction may be easing, although the outlook continues to be subject to more than the usual degree of uncertainty," said economists at Barclays Capital in a research note.
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