Wednesday, March 16, 2011

In change, Fed offers upbeat take on economy

The economic recovery is on “firmer footing’’ and the jobs market is “improving gradually,’’ the Fed declared in its statement released at the conclusion of its meeting yesterday.
That’s a more upbeat tone from its meeting on Jan. 26, when Fed policy makers said the rate of economic activity was “insufficient’’ to bring about “significant improvement’’ in the job market.
The Fed also downplayed inflation risks. And it dropped the phrase “disappointingly slow’’ in describing the progress made lowering the nation’s unemployment rate. That’s a reflection of a nearly full percentage point drop in just three months — the sharpest decline in unemployment since 1983.

The Fed, in a unanimous decision, yesterday said it was maintaining the pace of its $600 billion Treasury bond-purchase program to help the economy grow more strongly and to lower unemployment, which now stands at 8.9 percent.
The Fed made no mention of Japan’s crisis, which caused stocks to plunge earlier in the day. But the more positive outlook from the Fed helped Wall Street recover from a rough start. The Dow Jones industrial average ended the day nearly 138 points down, after falling by as much as 297 points in morning trading.

“Finally, the Fed is giving us a more upbeat outlook. It is not the all-clear signal. But the Fed is much more positive in terms of the sustainability of the economic recovery going forward,’’ said economist Chris Rupkey at Bank of Tokyo-Mitsubishi UFJ.

Rupkey and other economists viewed that as signal that the Fed won’t embark on a third round of stimulative bond buying when the program ends in June.

The Fed’s bond-buying program would help the US economy withstand widening economic risks from home and abroad. It is intended to lower loan rates and boost stock prices. Those forces should spur Americans to spend more and companies to hire more.

The Fed said higher prices for energy and other commodities are increasing inflation. But it predicted that the pickup in prices will be “transitory.’’ That’s consistent with the assessment Fed chairman Ben Bernanke gave to Congress earlier this month. The Fed said it will keep close tabs on inflation trends.

Despite the Fed’s more optimistic outlook, the list of potential risks to the economy has grown since the Fed’s last meeting. Japan is the world’s third-largest economy, so the earthquake and ensuing nuclear crisis there are certain to affect the global economy.

Oil price have spiked since January, rising as investors worry that unrest in the Middle East and Africa could hurt global supply. Oil prices have dipped in recent days and are hovering around $97 a barrel. Still, gasoline prices have stayed high and now average $3.57 a gallon nationwide.
Investors also are concerned that Europe’s debt crisis could linger. For the United States, the threats have the potential to slow the US economy, or stoke inflation. Or both.
Higher energy prices have some economists lowering their growth forecasts for the first three months of the year. They said high energy prices will slow consumer spending, which accounts for 70 percent of economic activity.JPMorgan Chase predicts growth in the January-March quarter of just 2.5 percent, down from 3.5 percent. The Fed, however, observed that consumers are increasing the amount they spend.

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