Fed to hold steady despite oil price and ravaged Japan

By @ibtimes on

The Federal Reserve looks set to maintain its ultra-loose monetary policy on Tuesday as lofty oil prices and swooning stock markets after Japan's ravaging earthquake raised doubts about the economy's path.

The worst earthquake on record for the world's third- largest economy could have substantial ripple effects on the global recovery -- as evidenced by a sharp pullback in global equity prices, with Japanese stocks down over 10 percent.

But with the full impact still unclear, economists say the best thing for Fed officials to do at the moment may be nothing at all.

Even before the tragedy, U.S. central bankers faced confusing signals. Despite high unemployment, rising energy costs appear to be nudging up the price expectations of U.S. consumers, the first inklings of an inflationary psychology the Fed would like avoid.

It's very tricky because calling out an increase (in expectations) would be a meaningful move in a hawkish direction, said Andrew Tilton, economist at Goldman Sachs.

At the same time, not acknowledging the recent pick-up seen in both market indicators and consumer surveys might make the Fed appear out of touch, eroding its inflation-fighting credentials.

In a statement due around 2:15 p.m., policymakers are likely to nod to recent improvement in the economy while seeking to avoid any suggestion that they intend to cut short a $600 billion bond-buying program announced in November.

Fed officials, who began their meeting at 8:30 a.m., will likely do so by beefing up their assessment of economic conditions while emphasizing just how far the central bank remains from its targets for both inflation and employment.

PROMISE AND WORRY

Since the Fed's last meeting in January, the U.S. economy has continued to show signs of promise. The U.S. unemployment rate has fallen rapidly, down to 8.9 percent in February from 9.8 percent in November.

Still, the pace of hiring suggests further progress will be painfully slow for the 8-million-plus Americans who lost their jobs during the economic slump of 2007-2009.

At the same time, higher gasoline costs have created fresh concerns for consumers, with a big hit to confidence this month raising concerns about whether a recent spurt in consumer spending can be sustained.

The U.S. economy expanded at an annualized rate of 2.8 percent in the fourth quarter, a respectable performance but one not seen fast enough to restore the job market to full health any time soon.

Some economists thought growth could approach 4 percent this quarter, but have pared back projections, in part because of an unexpected widening in the U.S. trade deficit.

The Fed chopped overnight interest rates down to effectively zero in December 2008 and since then has committed to buying a total of some $2.3 trillion in mortgage and Treasury securities to keep long-term borrowing costs down and support the recovery.

Those plans have proven controversial, with domestic critics arguing the Fed is courting future inflation while officials in emerging markets have accused the central bank of trying to boost U.S. exports by devaluing the dollar.

With the economy strengthening, officials are likely to have a vigorous debate on how best to eventually tighten policy, but analysts expect only minor changes to the Fed's statement.

Analysts will have to wait until minutes of the meeting are released in early April to get a fuller flavor of the discussions.

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