Fed meets, weighing tighter policy while others ease

GMT 12:34 2016 Wednesday ,16 March

Arab Today, arab today Fed meets, weighing tighter policy while others ease

US Federal Reserve chair Janet Yellen testifies before the House Financial Services Committee on Capitol Hill in Washington
Washington - AFP

Encouraged by US job gains but nervous about global volatility, Federal Reserve policymakers opened a two-day meeting Tuesday that is expected to signal higher interest rates in the future without daring to act now.

With its brethren in the central banking world either holding steady, or, like the European Central Bank last week, cutting rates, the Fed is wary of the concerns over another rate hike after December's.

But it must also weigh indications that the US economy is breaking away from the others, picking up speed and showing signs of inflation that would dictate tighter policy.

Most analysts think the policy-setting Federal Open Market Committee, led by Fed Chair Janet Yellen, will opt to hold steady for the mean time.

But the FOMC could also signal expectations that the current level of the benchmark federal funds rate, an ultra-low 0.25-0.50 percent, might not hold for much longer.

"Another federal funds rate increase is just not in the cards at this time," said Kim Chase at BBVA.

"Low inflation, heightened financial market volatility, and continued headwinds in the global economy are holding back the Fed from shifting the target rate up by another 25 basis points, despite the fact that the US economy is performing relatively well."

When the FOMC undertook its first rate increase in more than nine years in December, it also indicated expectations for another four quarter-point increases through 2016, predicting steady gains in jobs and a pickup in inflation.
But, with the US economy buffeted by a much sharper slowdown in the global economy -- especially China's -- than anticipated, recent comments by Fed officials have been more cautious.

And US data has not been unambiguously good. Job creation has been strong, but wages are still growing very slowly, when the Fed is looking for signs of upward wage pressure on inflation.

Likewise, the pulldown on inflation from the crash in the oil prices has been larger and more longer-lived than the Fed expected.

On Tuesday official data showed a still-weak wholesale inflation and a slowdown in retail sales over the first two months of the year that didn't match forecasts, given the strong pace of new hiring and the benefits of cheaper energy to household wealth.

"A massive downward revision to January sales suggests weak consumption didn't end at the turn of the year after all," said FTN chief economist Chris Low.

- Central bank divergence -

At the same time, the Fed has to keep an eye on the divergent paths of other central banks. Facing its own deflationary threat, last week the ECB lowered its already negative short-term interest rate, cut other key rates and added to its quantitative-easing stimulus program.

Earlier Tuesday the Japanese central bank held its main short-term rate in negative territory as it seeks to kick-start the sagging Japanese economy.

And on Thursday the Bank of England meets also facing weakness.

That will keep markets focused not only on how the FOMC's policy statement, to be issued at the end of the meeting on Wednesday, characterizes the strength of the US economy but also how it weighs the global environment.

The FOMC will issue new forecasts for growth, inflation and unemployment that will show how its views might have changed since December's firm optimism.

And then Yellen will shape the message on the policy trajectory in a press conference.

Analysts believe the Fed will confirm expectations to raise rates again this year, but how many times will be the question. Some say it could be just once. Other say two of three.

"Our best guess is that the median FOMC projection will be reduced to three 25 basis point increases in 2016," said a more bullish Deutsche bank analysis.

However, it said, Yellen and the committee will remain "sufficiently vague" so as to keep flexibility in the face of shifting data.


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