US economy can keep taper on track

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Reuters

US stocks rebounded from a sharp two-day slide after an early reading on earnings beat expectations.

Washington - Housing sales have stalled but the US economy is rebounding enough from the winter chill to keep the Federal Reserve's stimulus taper on track when policy makers meet next week.

All signs from members of the Federal Open Market Committee, including Fed chief Janet Yellen, suggest they will again cut back their bond-buying program in the Tuesday-Wednesday monetary policy gathering.

That will keep in place their march toward policy normalization, the exit from extraordinary measures launched to prop up the economy during the 2008 crisis.

The taper, begun in December, has brought the total monthly bond purchases down from $85 billion to a current $55 billion.

The FOMC will likely cut another $10 billion from that. Yellen has said the plan is to wind down the program - which has sought to hold down long-term interest rates to encourage investment and hiring - by late this year, as the economy has enough momentum to push ahead on its own.

“We anticipate a fairly uneventful Fed meeting,” IHS Global Insight economists said in a client note.

“The committee will likely cut the monthly pace of bond purchases from $55 billion to $45 billion... (but) not make any further changes to interest rates or its forward guidance,” they said.

“The outlook statement on the economy should be monitored, but so far the Fed's expectation that first quarter weakness was weather-related and temporary appears to be correct.”

The downturn that began in December, with output and hiring both much slower, left many analysts worried that the economy had shifted into low gear for fundamental reasons, not just because of a series of harsh storms that battered the eastern half of the United States.

IHS says the economy probably grew at an annual rate of only 0.7 percent in the January-March quarter, down from 2.6 percent the previous quarter.

Coming out of the period, the data remains mixed. Growth in home sales, an important part of the economy's recovery, has stalled. Commerce Department data showed new home sales were down 13.3

percent in March from a year ago, while used home sales were down 7.5 percent year-on-year.

That represents a greater-than-expected impact from last year's rise in mortgage rates, and possibly reflects that incomes have not risen much in the rebound from the crisis, even as home prices have, analysts say.

But another key indicator, durable goods orders, showed strong growth for the second month running in March, gaining 2.6 percent month-on-month after 2.2 percent in February.

The FOMC's own regional economic survey, the Beige Book released last week, painted a similar picture: a slowdown in housing but otherwise a pickup of economic activity overall.

Yellen said in an April 16 speech to the Economic Club of New York that the central bank did not view the winter downturn as representing any material change in growth.

“The unusually harsh winter weather in much of the nation has complicated this judgment, but my FOMC colleagues and I generally believe that a significant part of the recent softness was weather-related,” she said.

For that reason, she reiterated, the Fed will keep cutting back its bond-buying program.

But with no inflationary pressure evident, she added, the Fed also has no intention of increasing its benchmark federal funds interest rate from the current low 0-0.25 percent level anytime soon.

She said that, with considerable slack in the labor market and unemployment still high at 6.7 percent, the rate needs to stay low to fuel investment and hiring.

“My own view is that some portion of the decline in participation likely represents labor market slack,” she said.

The FOMC still sees a return to “normal” employment - 5.6 percent or lower - as “more than two years away.”

Sapa-AFP


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