Steady Fed sees firmer economy, watchful on oil

WASHINGTON Tue Mar 15, 2011 6:43pm EDT

U.S. Federal Reserve Chairman Ben Bernanke speaks at the Citizens Budget Commission Annual Dinner in New York March 2, 2011. REUTERS/Shannon Stapleton

U.S. Federal Reserve Chairman Ben Bernanke speaks at the Citizens Budget Commission Annual Dinner in New York March 2, 2011.

Credit: Reuters/Shannon Stapleton

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WASHINGTON (Reuters) - The Federal Reserve said on Tuesday the U.S. recovery is gaining traction and inflation pressure from soaring energy costs should be short-lived, allowing it to maintain its heavy support for the economy.

The U.S. central bank decided unanimously to forge ahead with its $600 billion bond-buying plan despite a considerably more upbeat assessment of the economy and the job market

It made no mention of Japan, which is grappling with the aftermath of the country's worst earthquake on record -- and struggling desperately to avert a nuclear disaster.

"The economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually," the Fed said in a post-meeting statement.

It was a much rosier outlook than the Fed had offered after its last meeting in January, when it characterized the recovery as still too weak to significantly bring down unemployment.

The statement also dropped a reference to economic progress being "disappointingly slow" and a list of roadblocks to consumer spending. In addition, it removed a passage stating that employers remained reluctant to hire.

"The Federal Reserve is setting the stage for an end to its aggressive monetary support for the U.S. economy," said Augustine Faucher, director of macroeconomics at Moody's Analytics. "The economic data have been stronger, markets are generally positive, and job growth is picking up."

However, meeting as global stock markets plunged in the aftermath of the Japanese earthquake, policymakers noted U.S. unemployment remains high, underlying inflation low and the housing sector depressed.

The Fed reiterated a pledge to keep interest rates, currently near zero, at very low levels for an extended period. That puts it at odds with other prominent monetary authorities like the European Central Bank, which has signaled a rate hike could come next month.

U.S. stocks trimmed losses after the Fed decision, but still closed down more than 1 percent. The dollar held steady against a broad basket of major currencies, while U.S. government debt prices pared earlier gains.

TOUGH TALK ON INFLATION

The Fed dedicated an unusually large portion of its statement to inflation concerns surrounding a recent spike in energy and food prices. It said it would monitor inflation and expectations for future prices closely, but added that the situation appears to be under control.

"Long-term inflation expectations have remained stable, and measures of underlying inflation have been subdued," it said.

Since the Fed's January meeting, the economy has continued to show signs of promise, with the unemployment falling to 8.9 percent in February from 9.8 percent in November.

Still, the pace of hiring suggests further progress will be painfully slow for the 8-million-plus Americans who lost their jobs during the economic slump of 2007-2009.

At the same time, higher gasoline costs have created fresh concerns for consumers, with a big hit to confidence this month raising concerns whether a recent spurt in consumer spending can be sustained.

The U.S. economy expanded at an annual rate of 2.8 percent in the fourth quarter, a respectable performance but a faster pace will likely be needed to make a further appreciable dent in unemployment.

After chopping overnight interest rates to near zero in December 2008, the Fed turned to buying mortgage and Treasury debt to keep long-term borrowing costs low and support the economy. In all, it has pledged to buy $2.3 trillion in debt.

The purchases have proven controversial, with domestic critics arguing the Fed is courting inflation while officials in emerging markets have accused the central bank of trying to boost U.S. exports by devaluing the dollar.

(Reporting by Pedro Nicolaci da Costa; Editing by Kenneth Barry)

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Comments (9)
AdamSmith wrote:
Just as many warned, the Fed is painting itself into a corner.

During the financial crisis in September 2008, after the Lehman bankruptcy, the US Treasury and Fed should have let nature take its course, and clean out the dead wood of over-leveraged investors, funds and organizations. The prudent investors, funds and organizations would have taken them over.

Instead the Fed and Treasury stepped in to protect all the over-leveraged wealthy institutions, cowboys like Goldman Sachs and AIG, and the aristocracy in general, which had made huge stupid gambles.

But it let the little man, the middle class man, go broke, go into bankruptcy.

Now it’s becoming more clear, even to the Fed, that it was a bad move for America.

Some defenders of the Fed say, “But we got most of the $700 billion back!”.

But that ignores the most important damage they did. They left the dead wood of over-leveraged institutions. And now its festering and infecting the whole economy, ruining our future.

The Fed happily helped the wealthy privatize their gains and socialize their losses.

Mar 15, 2011 2:44am EDT  --  Report as abuse
kevb wrote:
“Adam Smith” you hit the nail on the head. If your running for office you have my vote……..I only wish that the people we elect could realize this.

Mar 15, 2011 3:53pm EDT  --  Report as abuse
andrewhorning wrote:
Kevb, it’s not the politicians we choose who’ve been screwing up. It’s the people doing the choosing.
Politicians only reflect us. We need to earn a better reflection.
And the problems we reignited in 1913 are ancient. Moneychangers have taken down many nations, and it may already be too late for us.
When we lose our Reserve Currency status, and all those inflated coupons/notes are seen for what they really are, the USA will get a comeuppance like maybe nobody before us.
Nobody that I’m aware of has ever been so deeply in debt, since we’ve been so clever in our debt instruments…
Sigh…

Mar 15, 2011 4:46pm EDT  --  Report as abuse
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