With economic storm clouds gathering abroad and signs the US recovery is flagging, the US Federal Reserve yesterday may have felt compelled to launch a new round of monetary stimulus.
Confronted with rising financial strains in Europe, a year-end fiscal showdown in Washington and a sharp slowdown in hiring by US employers, many economists expect the Fed to extend a program aimed at pushing down longer-term interest rates to shield the still-fragile economy.
“The prevailing bias at the Fed is very much tilted toward providing more accommodation,” said Eric Green, global head of rates research and strategy at TD Securities in New York.
An extension of “Operation Twist,” in which the central bank sells bonds with maturities of three years or less and buys securities with maturities of six years and longer, is seen as a less extreme step than outright purchases of new securities. This week is the Fed’s last scheduled policy meeting before Operation Twist expires at the end of this month.
Another option for the US central bank, which was due to wrap up a two-day meeting yesterday, would be to push back its estimate for when it would finally raise overnight interest rates, which have been held near zero since December 2008. After its meeting in April, it said it expected to keep them “exceptionally low” through at least late 2014.
Even though Greek voters over the weekend supported candidates who back taking painful steps to stay in the eurozone, Europe’s debt crisis remains a threat to the global economy. Spain on Tuesday paid a euro-era record price to sell short-term debt.
“I don’t think this provides [Fed officials] with much relief,” former US Fed Vice Chairman Donald Kohn said of the vote in Greece. “As we’re seeing ... tensions in the euro area remain pretty intense.”
Fed officials, were due to announce their policy decision at 12:30pm, will weigh not only the situation in Europe, but evidence from labor, manufacturing and housing reports that US growth has faltered. They also are worried the recovery could be damaged if politicians fail to resolve differences over automatic tax increases and spending cuts due to kick in at the end of the year.
The US recession ended in 2009, but the economy has failed to recoup lost jobs and wealth, leading to a widespread sense of malaise.
With lawmakers locked in partisan positions ahead of elections that will determine control of the White House and Congress, the Fed is the only institution in a position to boost economic growth.
Top Fed officials have made clear that they would need to see the painfully high US jobless rate continue to recede to stay on the sidelines. In May it rose to 8.2 percent.
Officials are likely to downgrade their economic projections, which were due to be released at 2pm. In April, they were expecting growth between 2.4 percent and 2.9 percent this year. US Federal Reserve chairman Ben Bernanke was due to follow with a news conference at 6:15pm GMT.