Signs of weakness in US economy raising questions

Fed faces red flags as it taxis toward rate liftoff

GMT 09:08 2015 Tuesday ,27 January

Arab Today, arab today Fed faces red flags as it taxis toward rate liftoff

The Federal Reserve in Washington
Washington - Arab Today

The Federal Reserve taxis toward a liftoff this year in interest rates in a meeting that begins Tuesday, with signs of weakness in the US economy raising questions about timing.
The Fed is expected to stay the course on monetary policy in its statement Wednesday and stress patience in waiting to see whether the economy is strong enough to withstand the first increase in the federal funds rate since 2006.
Since the December meeting of the Federal Open Market Committee (FOMC), the central bank's policy arm, the rapid slide in oil prices has pulled already weak inflation lower, corporate earnings season has gotten off to a bumpy start, and the nearly stagnant eurozone has been further roiled by Greece's overwhelming vote Sunday for a leftist, anti-austerity party.  
The European Central Bank's announcement last week of a massive bond-purchase program, or quantitative easing, to stimulate growth and avert deflation in the 19-nation eurozone was expected to at least help the huge US trade partner in the short term.
For the FOMC, which exited QE in October, the question now is to decide when to lift its ultra-low key federal funds rate, pegged between zero and 0.25 percent since late 2008 to support the economy's recovery from the deep 2008-2009 recession.
After months of mostly positive data -- in December, the US unemployment rate fell to 5.6 percent and consumer confidence rebounded -- some weak spots have emerged. Job growth slowed but remained solid; wages sagged, barely keeping up with inflation; and retail sales plunged broadly in a critical month for stores in the holiday shopping season.
"Wednesday's FOMC meeting will provide another chance for the Fed to assess the impact of the higher dollar and lower oil prices on the policy outlook.  We don't anticipate major changes to the statement," said Barclays in a research note.
- Fed seen sitting tight -
Oil prices have fallen about 60 percent since June, trading at 2009 lows as investors worry about slowing global economic growth and a supply glut.
The minutes of the FOMC's December 16-17 meeting showed Fed officials saw a boon from lower oil prices for the US economy.
But the Fed's latest Beige Book report on US economic conditions, prepared for discussion at this week's meeting, revealed lower oil prices were hitting the economies of energy-producing regions like Texas and North Dakota and in some cases weighing on the jobs market.
The US economy generated "modest" or "moderate" growth in late 2014, according to the report, which noted virtually no upward pressure on wages, a key concern of Fed officials.
"This economy is still strong and there is no reason to think the Fed members will or should back off from their evaluation of conditions" at their meeting, said Joel Naroff of Naroff Economic Advisors.
According to the December FOMC minutes, the first hike in the federal funds rate could come at the April 28-29 meeting. Some Fed-watchers expect it to be announced at the June 16-17 meeting, which is followed by a news conference with Fed Chair Janet Yellen. There is no news conference scheduled Wednesday.
"The big wild card is what happening on inflation," said Stephen Oliner of the American Enterprise Institute.
Oliner, who served more than 25 years on the Federal Reserve board, said that if inflation were "anywhere close" to the Fed's 2.0 percent target and expected to remain there, "they definitely would be tightening monetary policy in the first half of this year."
"My best guess would be September. I know the majority of opinions is for June but when I think about the information that they will have about inflation when they have the June meeting, I'm not sure there is going to show inflation moving back toward their target," he said.
Source: AFP


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