THE FEDERAL Reserve stopped short of offering new monetary stimulus yesterday even as it signalled further bond buys could be in store to help the US economic recovery it said had lost momentum this year.
Fed officials described the economy as having “decelerated somewhat”, a change of tone from its previous assessment in June, when it said the economy had been “expanding moderately”.
The Fed’s policymakers also reiterated their disappointment with the slow pace of progress in bringing down the US’s 8.2 per cent jobless rate.
The central bank dashed expectations among some investors by taking no new measures.
US stocks turned lower shortly after the statement and the dollar rose against the euro and the yen.
“The market had gotten ahead of itself a bit in terms of what the Fed would do,” said Steven Ricchiuto, chief economist at Mizuho Securities in New York.
“Markets will be disappointed, as they should be. But it did seem it would at least manage expectations. They did absolutely nothing here. It suggests there is a lot of internal debate going on in the Fed.”
Many economists had expected the central bank to extend further into the future its guidance for low rates but the statement maintained its late-2014 language.
The Fed nevertheless showed it was prepared to do more to support an ailing economy.
“The committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed,” the Fed said in its statement.
US economic growth slowed to 1.5 per cent in the second quarter as consumer spending faltered, and unemployment remains far too high for the comfort of a central bank that has a dual mandate to keep inflation low and employment high.
Job growth slowed sharply in the second quarter to just 75,000 jobs per month from 226,000 in the first quarter.
A report yesterday showed US companies added 163,000 jobs in July, more than expected.
However, that survey, the ADP national employment report, does not carry as much weight as the government’s more comprehensive labour market report due on Friday. It includes both public and private sector employment.
Manufacturing data from the Institute for Supply Management pointed to a second month of contraction in the factory sector.
The Fed met a day before a key meeting of the European Central Bank. Europe’s crisis is blamed for part of the US slowdown, as fears of another financial crisis keep businesses and consumers on the defensive.
Against that backdrop, many think Fed chairman Ben Bernanke could use his speech at the bank’s high-profile gathering in Jackson Hole, Wyoming, in late August to send a strong message to markets. He used that forum in 2010 to communicate the Fed’s intention to pursue a second round of quantitative easing, or QE2.
A third instalment of QE would probably involve some component of housing debt as the Fed attempts to breathe fresh life into a housing sector finally showing some signs of healing. – (Reuters)
