* FOMC to mark time as jobless rate stays too high
* Better times ahead, but Fed likely on hold into 2014
* Rumble of currency wars is newest global risk
By Alan Wheatley, Global Economics Correspondent
LONDON, Jan 27 The Federal Reserve's ultra-loose
monetary policy is a root cause of the "currency wars" that some
see as a looming threat to the world economy, but don't expect
the U.S. central bank to signal a shift back to normal any time
The Fed, whose policy-setting Federal Open Market Committee
concludes a two-day meeting on Wednesday, said just last month
that it expects to keep short-term interest rates exceptionally
low until the U.S. unemployment rate falls to 6.5 percent,
That goal is still distant. Figures on Friday are likely to
show that the jobless rate was unchanged in January at 7.8
percent, while the economy created 155,000 jobs, the same as in
December, according to economists polled by Reuters.
So it would be a huge surprise if the Fed were to do
anything other than reaffirm last month's decision to anchor
short-term interest rates in a range of zero to 0.25 percent and
to keep buying $85 billion of bonds each month to hold down
The only question mark is whether the FOMC vote will be
unanimous now that Richmond Fed President Jeffrey Lacker, who
opposes the current round of bond-buying, has rotated off the
panel, said Harm Bandholz, an economist with UniCredit Bank in
Most economists polled by Reuters expect the Fed to keep its
open-ended bond-buying programme in place well into next year,
even though the economic news flow and market confidence are
True, Wednesday's preliminary report on fourth-quarter GDP
is likely to show that growth slowed to an annualised rate of
1.2 percent from 3.1 percent in the July-September period.
And the current quarter will also be soft as the expiry of a
2 percent payroll tax cut is dampening consumer spending.
But then Bandholz expects an average growth rate of 2.8
percent over the rest of the year. That would be the strongest
three-quarter period of the recovery so far, he said.
"The outlook has improved a lot in the U.S. I've been on the
cautious side for the last three years, but this time I'm a bit
more bullish," he said.
THE FED BIDES ITS TIME
The recovery in housing would add at least half a percentage
point to GDP growth in 2013, while capital spending was likely
to revive now that uncertainty over budget talks in Washington
had been largely allayed, Bandholz said.
"There's a lot of pent-up demand in the system. I don't
think all these investments have been abandoned; they've just
been postponed," he said.
At some point, investors' exuberance over the super-easy
stance of the world's major central banks will give way to
worries that they are about to take away the punch bowl.
Gustavo Reis, an economist with Bank of America Merrill
Lynch in New York, said concerns about the costs of
money-printing were likely to spread but would be offset by
uncertainty over the impact on growth of fiscal tightening in
the United States and Europe.
"All told, although global activity seems more robust now
than at any point in 2012, we expect policymakers to continue to
worry predominantly about downside risks," he said in a note.
The bank does not expect the Fed to consider halting asset
purchases before 2014, while the latest episode of monetary
easing announced by the Bank of Japan is likely to be
'long-lived and significant'.
Many economists argue that bold monetary action is long
overdue in Japan, whose nominal output has not grown in 20
years, saddling the government with a debt-to-GDP ratio of more
than 220 percent.
But Douglas McWilliams, who heads the Centre for Economics
and Business Research, a London consultancy, fears Japan's
decision will lead the global economy into unpredictable
"It's a bit like if someone's rude to you, you're rude to
them back. You get tit-for-tat behaviour," McWilliams said.
CURRENCY FRICTION, BUT NO WAR
Olivier Blanchard, the chief economist of the International
Monetary Fund, last week called talk of currency wars overblown
and said countries had to pull the right policy levers to get
their economies back on track, with corresponding consequences
for exchange rates.
However, McWilliams said the problem was that it was
difficult to get countries to agree NOT to wage currency wars.
Tellingly, Chancellor Angela Merkel voiced German concerns
last week that Japan might be deliberately seeking to cheapen
the yen to give its exporters a competitive edge.
"So we may well find that there is a period of very heavy
volatility before the authorities involved try and get some kind
of agreement," McWilliams said.
In a relatively quiet week for economic data in the euro
zone - money supply figures and confidence surveys from the
European Commission are the highlights - the focus is likely to
remain squarely on the euro, which has been rising briskly as
traders price in the policy shifts that Blanchard had in mind.
While the Fed and the Bank of Japan are expanding their
balance sheets, the European Central Bank is starting to soak up
some of the emergency cash it lent to banks a year ago.
The central bank said on Friday that banks would repay early
137 billion euros of cheap borrowed money.
"I'm not sure if we have too strong a euro for the moment
but certainly we would not want to see a currency war of
competitive devaluations which would have a negative effect on
the euro," the European Union's top monetary official, Olli
Rehn, told Reuters.