Fed to extend "extended period"

By Pedro Nicolaci da Costa

WASHINGTON (BestGrowthStock) – With official interest rates near zero and the Federal Reserve unable to cut them any further, every policy meeting by definition brings the central bank one step closer to an eventual monetary tightening.

As signs of firmer U.S. growth become more widespread, investors are getting antsy about anticipating the Fed’s next move, a guessing game sure to gather momentum as the Federal Open Market Committee holds a two-day meeting this week.

Much of the discussion in the markets now centers upon how soon the Fed will abandon a commitment to keep rates really low for an “extended period” — and how quickly after that it might get down to the real business of pushing rates higher.

Judging by the cautious tone of the Fed’s most influential members, and the weight of their views on the committee’s policy decisions, those looking for imminent rate changes have probably gotten ahead of themselves.

“The Fed is in no hurry to raise rates,” said Eric Green, economist at TD Securities. “The FOMC meeting will not show any material digression from the methodical wait-and-see approach to policy.”

The unfolding crisis in Greece, which took a turn for the worse on Friday as the country announced it would need to tap an emergency aid package from Europe and the International Monetary Fund, is also casting a pall over a still-nascent global recovery.

It was the first such rescue of a member nation since the euro’s inception 11 years ago, triggered by a months-long market selloff and Athens’ failure to convince investors it is dealing with its 300 billion euro debt pile.

Greece’s travails dominated discussion at weekend meetings of the Group of 20 and International Monetary Fund, largely because it is not just the Europeans who have reason to worry about rising debt burdens and markets’ attitude to them.

While Greece’s deficit as a percentage of total output is the eurozone’s highest, other countries like Portugal and Spain have fiscal troubles of their own, not to mention the United Kingdom and the United States.

BETTER WORRIES

Much of the underlying strength evident in the U.S. rebound has come from manufacturing, where activity has picked up steadily in recent months. A report on durable goods orders published on Friday underscored that trend, with a measure seen as a good proxy for business investment surging 4 percent.

Such vigor, though, is dependent in part on the country’s ability to export — including to its European trading partners. With Europe’s growth prospects challenged, American multinational firms are likely to feel some ripple effects.

Concerns about the sustainability of the recovery, though, are a luxury compared with how things looked a year ago, when a continuing financial meltdown still seemed plausible and the world’s rich nations were mired in recession.

Since then U.S. gross domestic product growth has posted an impressive rebound, accelerating as 2009 drew to a close. The solid expansionary trend is likely to have persisted into this year. On Friday, the Commerce Department will release its early estimate for first quarter growth, and analysts polled by Reuters are forecasting a 3.3 percent annualized increase.

Even consumer spending has picked up despite fears that a debt-led recession would give way to a prolonged retrenchment. That trend should bolster near-term growth, though it may not be entirely positive in the absence of rising incomes.

“You have to remember why that’s happening,” warned Tom Porcelli, senior market economist at RBC Capital Markets. “They basically financed it via a drawdown in savings. That’s not necessarily a encouraging outcome.”

World finance leaders also took note of that, saying that although the recovery was better than expected, countries had to stay vigilant and follow through on pledges to regulate the financial sector and corral government debt.

As for Fed officials, they do not appear to believe the recovery is sufficiently robust to withstand a near-term pullback on some of the extraordinary stimulus it delivered to fight the worst recession since the Great Depression.

While minutes from the Fed’s last meeting prompted speculation that policymakers were trying to remove any specific time element from the extended period, few believe leading voices like Ben Bernanke and Donald Kohn have suddenly become more hawkish on rates. “Extended period” looks set to get an extended stay.

“I don’t think there’s any doubt at this point that the phrase is going to stay in,” Porcelli said. “Bernanke has made that very clear. Who are we to argue with the Chairman?”

(Reporting by Pedro Nicolaci da Costa; editing by Patrick Graham)

Fed to extend "extended period"