News Column

Fed Expected to Leave Rates Unchanged

July 30, 2013

Frank Fuhrig, dpa


The rate-setting US Federal Reserve is widely expected to continue pursuing the loosest monetary policy in its 100-year history - for at least a few more weeks.

After gathering Tuesday in Washington for their two-day regular meeting, Fed board members are scheduled to announce their decisions on monetary policy after 2 pm Wednesday (1800 GMT). No surprises are anticipated.

The central bank has kept its key interest rate near zero since December 2008 and has declared its intention not to raise the benchmark rate until the unemployment rate - currently at 7.6 per cent - falls to 6.5 per cent, barring a spike in inflation.

The unprecedent slack money supply has since been supplemented since September 2012 by Fed buying of US Treasury notes and government-linked bonds - so-called quantitative easing - in effect, printing money and pumping it into the private sector in hopes of spurring investment.

A survey of 54 Wall Street economists last week by Bloomberg News found that none expected the Fed to begin slowing its 85-billion-dollar monthly rate of bond buying in Wednesday's announcement. Half of the responding experts thought the central bank would start paring the bond purchases in September.

After the last meeting in June, Fed chief Ben Bernanke said that step could begin later this year with an eye toward ending the extraordinary monetary policy measures by mid-2014.

The bond buying amounts to about 1 trillion dollars a year in the 16-trillion-dollar US economy.

Gross domestic product - the output of goods and services - expanded at an annualized rate of 1.8 per cent in the January-March quarter, according to the government's last revision in June. It was a jump from a rate of just 0.4 per cent in the fourth quarter of 2012.

The first estimate of second-quarter GDP is due Wednesday at 8:30 am (1230 GMT).

The government's Consumer Price Index was at 1.8 per cent for the 12 months through June. Core inflation, which excludes volatile food and energy prices, was at 1.6 per cent, falling below the Fed's long-term target of 2 per cent.

A more obscure measure of personal consumption spending - known to be Bernanke's preferred inflation gauge - was up only 1 per cent for the 12 months through May.

"This softness reflects in part some factors that are likely to be transitory," Bernanke said in July 17 testimony. "Moreover, measures of longer-term inflation expectations have generally remained stable, which should help move inflation back up toward 2 per cent."

Yet he conceded that "very low inflation poses risks to economic performance - for example, by raising the real cost of capital investment - and increases the risk of outright deflation. Consequently, we will monitor this situation closely as well, and we will act as needed to ensure that inflation moves back toward our 2 per cent objective over time."

Before his Federal Reserve career, Bernanke was best known for his economic studies of the Great Depression, and he has a record of advocating monetary policy measures - particularly quantitative easing - to head off deflation.

Sentiment among consumers in the United States was off slightly in July but remained significantly higher than a year earlier, according to private data reported Tuesday.

The Consumer Confidence Index was at 80.3, down from a five-year high of 82.1 in June, based on a monthly survey by the Conference Board, a New York-based business think tank. The same long-running index, set at 100 in 1985, was at 65.9 in July 2012.

The erosion in sentiment since June was "precipitated by a weakening in consumers' economic and job expectations," said Lynn Franco, Conference Board director of economic indicators.

"Consumers' assessment of current conditions continues to gain ground and expectations remain in expansionary territory despite the July retreat," Franco said. "Overall, indications are that the economy is strengthening and may even gain some momentum in the months ahead."

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Source: Copyright 2013 dpa Deutsche Presse-Agentur GmbH

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