Fed won’t act soon on weak US economy

Thursday, 23 June 2011 00:00 - - {{hitsCtrl.values.hits}}

WASHINGTON (Reuters): The Federal Reserve will likely acknowledge renewed weakness in the U.S. economy in a post-meeting policy statement on Wednesday, but don’t expect policymakers to do anything about it any time soon.

That’s in part because underlying inflation trends, considered too low in the period preceding the launch of the central bank’s most recent round of bond purchases, have been rising.

Moreover, the central bank faced intense criticism as its second round of quantitative easing -- a $600 billion bond purchase program known as QE2 -- sparked accusations that policymakers were sowing the seeds for future inflation.

The U.S. economic recovery, nearing its second anniversary, appears to be losing steam. Gross domestic product grew at just a 1.8 percent annual rate in the first quarter, and the second quarter’s performance is not looking much better.

Fed Chairman Ben Bernanke, in his second-ever news conference at the conclusion of the meeting, will most probably reiterate his forecast for a rebound in the second half of the year.

“He’s going to confirm that the hurdle for quantitative easing, version 3, is quite high,” said Jacob Oubina, senior U.S. economist at RBC in New York.

Still, likely downward revisions to the central bank’s growth forecasts for 2011, which at 3.1 percent to 3.3 percent as of April now look a bit lofty, will offer a public acknowledgment that the economy continues to disappoint.

Fed officials cut interest rates to near-zero in December 2008 and will have pumped $2.3 trillion into the economy by the time their bond purchases run their course at the end of this month in the hopes of spurring a stronger recovery.

Bernanke will certainly face tough questions about Greece and the impact of Europe’s debt woes on the United States, an issue that has reached fever pitch in financial markets. But the Fed chief will try his best to duck any specifics, deferring instead to his European counterparts.

At the very least, the mix of turbulence abroad and renewed malaise at home should dampen any talk of withdrawing stimulus for now, and delay the eventual start date of any monetary tightening cycle.

In a statement due for release around 12:30 p.m. (1630 GMT), the Fed looks set to repeat its commitment to keeping interest rates low for an extended period, while also restating an intention to continue reinvesting proceeds from maturing bonds it holds back into the Treasury market. Bernanke’s news conference will following at 2:15 p.m. (1815 GMT).

The central bank and its chairman will have to describe the inflation outlook with some nuance, since energy costs have come down rapidly even as core inflation readings that exclude food and energy have edged higher.