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Fed May Keep Asset Purchases Unchanged as ‘Green Shoots’ Emerge
http://www.bloomberg.com/apps/news?pid=20601087&sid=aMlGWdPsvTrU&refer=home#
By Steve Matthews
April 29 (Bloomberg) -- Federal Reserve officials will probably hold off boosting their purchases of Treasuries and mortgage securities as they gauge the strength of the “green shoots” of an economic recovery.
The Fed concludes its two-day meeting today, and for the first time in more than a year officials will contend with improving prospects for a recovery. House-price declines are slowing, consumer confidence is rising and efforts to repair the credit markets are showing some signs of success.
Chairman Ben S. Bernanke and his colleagues are counting on reviving growth by financing the purchase of $1 trillion in asset-backed securities and by buying as much as $300 billion in long-term Treasuries and $1.45 trillion in mortgage debt. With the unprecedented assistance yet to reach full force, policy makers may want to hold off on committing more aid and see if the favorable economic data continues.
“There wouldn’t be a case for new moves unless the economy appeared to be deteriorating at a faster clip, and the opposite is the case since the last meeting,” said former Federal Reserve Governor Lyle Gramley, now with Soleil Securities Corp. The statement may include “an acknowledgement that the decline in activity seems to have moderated a bit.”
The Fed’s Open Market Committee is scheduled to issue its statement around 2:15 p.m. today in Washington.
Bernanke reiterated on April 14 that the central bank will “take the necessary steps to unclog credit markets and strengthen the economy,” a remark seen as signaling the Fed’s willingness to expand its emergency credit programs.
Waning Turmoil
The Fed chief also said the “sharp decline” in the economy may be slowing, citing a firming in auto sales and home sales and waning turmoil in some credit markets. In March he said some financial markets were sprouting “green shoots.”
The so-called Libor-OIS spread, a measure favored by former Federal Reserve Chairman Alan Greenspan that gauges banks’ reluctance to lend to one another, fell to 0.84 percentage point yesterday, the lowest level since prior to the collapse of Lehman Brothers Holdings Inc. in September, according to data compiled by Bloomberg.
Slowing declines in housing prices and orders for U.S.-made durable goods, along with mixed reports on consumer spending, also suggest the contraction is easing.
Consumer confidence as measured by the Conference Board’s sentiment index jumped more than forecast this month as stocks rallied, mortgage rates dropped and Americans thought more jobs will become available. Consumer spending, which has shown recent signs of gaining, accounts for 70 percent of the economy.
Slower Pace
Home prices in 20 major U.S. metropolitan areas dropped at a slower pace in February, the S&P/Case-Shiller index showed yesterday. Fed officials have said stability in house prices and banking are essential for an economic recovery.
Also, the Standard & Poor’s 500 Index has climbed 28 percent since March 6 as companies from American Express Co. to Ford Motor Co. posted better-than-estimated earnings and investors speculated a U.S. Treasury plan to finance the purchase of illiquid assets from banks will help to pull the global economy out of a recession.
Policy makers “may well say encouraging words about official efforts at market repair since that’s the area that has changed the most since March,” said Vincent Reinhart, who was the Fed’s chief monetary-policy strategist from 2001 until September 2007.
Negative Data
Central bank officials have no shortage of negative data to review
. The U.S. economy declined at a 4.7 percent pace in the first quarter, according to the average estimate of economists surveyed by Bloomberg. The government’s figure will be reported today. Fed governors and presidents, who prepare forecasts quarterly, will probably revise their forecasts for unemployment higher while making little change to their forecasts for growth.
The Fed has underestimated the damage from the recession that began in December 2007. Policy makers predicted in January that the jobless rate would peak this year at 8.5 percent to 8.8 percent. The rate hit a 25-year high of 8.5 percent in March, and will rise to 9.5 percent by the fourth quarter, according to the median forecast of 57 economists surveyed this month by Bloomberg News.
The gap between the U.S. economy’s potential and performance is widening to the highest degree since the Great Depression, Goldman Sachs Group Inc. economist Ed McKelvey said.
‘Full Speed’
“It is full speed ahead with zero rates and the purchase programs,” said Stephen Stanley, chief economist at RBS Securities Inc. in Greenwich, Connecticut, who formerly worked at the Fed. “The committee’s assumptions on unemployment will go up by more than a little.”
“The board staff is very closely tied to the output gap idea, and is going to be sanguine about inflation for the foreseeable future,” he said.
The committee will probably retain its assessment that inflation “will remain subdued in coming quarters” because of increasing slack in the economy and rising unemployment, Fed watchers said. The consumer price index fell 0.4 percent in March from a year before, the first annual decline since 1955.
Bernanke underscored this month the risk of a period of falling prices, similar to Japan’s experience in the 1990s, if the economy performs worse than anticipated.
Still, policy makers should try to ensure inflation doesn’t flare during a recovery, especially after doubling the central bank’s balance sheet to $2.2 trillion during the past year, said Brian Wesbury, chief economist at First Trust Advisors LP in Lisle, Illinois.
