- POSTED: 29 Apr 2014 23:25
The Federal Reserve is expected to keep its monetary stance unchanged as it starts a two-day policy meeting on Tuesday, with all eyes on how the US economy exits its winter freeze.
WASHINGTON: The Federal Reserve is expected to keep its monetary stance unchanged as it starts a two-day policy meeting on Tuesday, with all eyes on how the US economy exits its winter freeze.
Fed Chair Janet Yellen and other members of the Federal Open Market Committee have said they are fairly sure that the economy's winter slowdown was mainly due to extremely harsh weather.
As housing industry data shows a stall in the four months to March, and job creation data still not particularly strong, analysts expect the FOMC to maintain its very doveish stance.
And with no threat of inflation, policy-makers are expected to stick to the forecast of an ultra-low interest rate policy through next year.
Indeed, after significantly reshaping the Fed's messaging and policy targets in its March meeting, Yellen is expected to let existing policy settle in and watch where the economy goes in the spring thaw.
There will be no fresh Fed forecast data and no public comments by Yellen, who stirred up markets by misspeaking on the timeline for a possible interest rate hike in 2015.
The two-day FOMC meeting "is not expected to produce the fireworks that followed the March deliberations," said Steven Ricchiuto, economist at Mizuho Securities.
After the March gaffe, he said, Fed policy makers this time are "on notice that the markets are apt to overreact to even the smallest change in the perceived policy path."
The one key action expected will be another step in the drawdown of the bond-buying stimulus program, cutting it by another $10 billion a month.
The Fed embarked in December on slowly winding up its "quantitative easing" operations, in place in one form or another since 2008 to hold down long-term interest rates.
Since December, the program has shrunk from $85 billion a month to $55 billion now, and the expected decision Wednesday will take it to $45 billion.
That would signal that, despite a clear economic slowdown in the December-February period, the FOMC sees the economy strong enough to sustain a moderate pace of growth with less easy money.
Yellen said in an April 16 speech to the Economic Club of New York that the central bank did not view the winter downturn as representing any material change in growth.
"The unusually harsh winter weather in much of the nation has complicated this judgement, but my FOMC colleagues and I generally believe that a significant part of the recent softness was weather-related," she said.
But with no inflationary pressure evident, she made clear that the Fed also has no intention of increasing its benchmark federal funds interest rate from the current low 0-0.25 per cent level before mid-2015.
With considerable slack in the labour market and unemployment still high at 6.7 per cent, the rate needs to stay low to fuel investment and hiring, she said.
The FOMC still sees a return to "normal" employment -- 5.6 per cent or lower -- as "more than two years away."
Markets meanwhile appear to have now dismissed Yellen's March comments on an eventual rate hike next year as a rookie mistake in her first policy press conference as Fed chair.
She sent bond yields higher and stocks sinking when, in response to a question, she said that interest rates could begin rising "something on the order of around six months" after the stimulus was fully wound up.
Having already said that the taper would be complete by the fall of this year, that theoretically placed a rate hike in the first or second quarter of 2015 -- roughly three months earlier than the Fed had signalled.