WASHINGTON (Reuters) ? The Federal Reserve looks set to keep monetary policy on hold on Wednesday, even as it releases forecasts expected to show interest rates will be near zero for at least two more years.
Given recent improvement in the U.S. economy, the central bank will probably remain non-committal regarding the prospect for additional bond purchases, but will leave the door open to further action if Europe's banking problems spill over into the United States.
As part of an effort to provide more insight on its thinking to financial markets and the public, the Fed will begin publishing individual policymakers' projections for the appropriate path of the benchmark federal funds rate.
In so doing, the Federal Open Market Committee, the central bank's policy-setting arm, will probably reveal that it does not expect to begin raising rates until at least early 2014. Since August, it has only said after every policy session that it expected to keep rates ultra-low until at least mid-2013.
If the Fed can convince financial markets it will be on hold longer than they had anticipated, long-term interest rates could drop as investors price in the new information.
"A significant contingent of the committee views this exercise not so much as a process improvement but more as an opportunity to ease again via the forward rate communications channel," said Stephen Stanley, economist at Pierpoint Securities.
There is also the possibility that officials will announce an explicit inflation target, perhaps a hard marker of 2 percent or a range of 2 percent or a bit below. The Fed has been debating a statement on its long-run goals, but whether one will be released on Wednesday is unclear.
The Fed will release a statement outlining its views on the economy and monetary policy at about 12:30 p.m. The rate projections, along with regular quarterly economic forecasts, will be issued at 2 p.m.
While forecasters expect the U.S. economy grew at a 3 percent annual rate in the last three months of 2011, Fed officials will probably shy away from any explicit hints on the likelihood of further unconventional monetary easing.
However, many analysts think the recent momentum in the U.S. recovery will wane as Europe's economy falters, potentially prompting another spurt of Fed bond buying - probably one focused on mortgage debt.
Since December 2008, in response to the deepest recession in generations, the Fed slashed rates to effectively zero and also more than tripled the size of its balance sheet to around $2.9 trillion through two separate bond purchase programs.
The policy is credited with having prevented an even longer downturn, but has been insufficient to bring down unemployment to levels considered normal during good economic times.
In December, the U.S. jobless rate stood at 8.5 percent, and some 13 million Americans were still actively looking for work but could not find it.
Analysts note that the Fed's shift in communications, which has led to considerable confusion about just what exactly will be announced, will put an even greater emphasis on a post-meting news conference by Fed Chairman Ben Bernanke at 2:15 p.m.
"The chairman is likely to remain non-committal to any additional policy easing, but he is likely to reinforce the Fed's commitment to 'review the size and composition of its securities holdings' and be 'prepared to adjust those holdings as appropriate,'" said Millan Mulraine, senior macro strategist at TD Securities.
(Editing by Tim Ahmann)
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