News Column

Fed Likely to Continue With Low-interest Policy

April 30, 2013
federal reserve

The Federal Reserve appears more committed to keeping its easy-money policies going this year and could even expand them amid recent disappointing economic reports and extremely low inflation.

After a two-day meeting, Fed policymakers on Wednesday are expected to agree to continue buying $85 billion a month in Treasury bonds and mortgage-backed securities until the labor market improves substantially. The program is intended to hold down long-term interest rates to spur more borrowing and help channel investments to stocks, driving up the market.

Maintaining the policy, in itself, would not be surprising and would reflect the Fed's approach since last fall. According to the minutes of the Fed's March 20 meeting, many Fed officials favored tapering bond purchases this year and ending them by December, assuming monthly job gains continued to be strong.

"I think (the Fed) is leaning more and more toward keeping (the bond purchases) in place beyond 2013, and there is even the possibility they might expand the program," says economist Paul Edelstein of IHS Global Insight.

Employers added just 88,000 jobs in March, and measures of retail sales and economic and service sector activity weakened last month. Friday, the government said the economy grew at a 2.5% annual rate in the first quarter, less than the 3% or more economists anticipated.

On Monday, meanwhile, the Commerce Department reported that a key gauge of inflation rose just 1% in March vs. a year ago, well below the Fed's 2% target. With inflation less of a threat, "It means (the Fed) can be more aggressive," because it's unlikely more economic activity will push inflation beyond the Fed's goal, says economist Paul Ashworth of Capital Economics.

Moreover, low inflation generally means the economy is growing too slowly. It could spur consumers to put off purchases because prices are likely to stay low, and it blunts the effects of the Fed's near-zero interest rates, says Tim Duy, an economics professor at the University of Oregon and author of the Fed Watchblog.

Several Fed officials recently have said they would seriously consider increasing the bond purchases if very low inflation persists.

One is Richmond Fed President Jeffrey Lacker, one of the Fed's more conservative officials who typically worries more about too much stimulus setting off inflation.

Lacker told Bloomberg News he thinks it's unlikely very low inflation will continue, a view Edelstein and Duy echoed. Across the board federal spending cuts that took effect March 1 and Congress' failure to renew a payroll tax cut in January have begun to dampen economic growth. A colder-than-normal March also crimped activity. But many economists say those effects are likely temporary, and a strengthening housing market and private sector should boost growth in the second half of the year.

Still, several Fed policymakers recently have voiced support for keeping the current pace on purchases, including Boston Fed President Eric Rosengren and Chicago Fed chief Charles Evans.




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Source: Copyright USA TODAY 2013


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