US Fed may step up stimulus measures

TROUBLE AHEAD::The FOMC is keeping its options open as US firms hired the fewest employees in seven months last month, while manufacturing growth slowed to a crawl


Fri, May 03, 2013 - Page 15

The US Federal Reserve kept its easy-money policies on Wednesday, but left the door open to step up bond purchases if the economy slowed under the government’s severe “sequester” spending cuts.

The central bank’s policy board, the Federal Open Market Committee (FOMC), said after a two-day meeting that the economy continued to grow at a “moderate” pace, but it also said that growth was being restrained by the government’s tighter fiscal policy, which imposed tax increases in January and across-the-board spending cuts in March.

The Fed suggested, in a change from previous statements, that it would keep open the option of more stimulus — larger bond purchases — if the economy slows.

As widely expected, the FOMC held its key interest rate at zero to 0.25 percent and the Fed policymakers also stuck to their US$85 billion a month bond-buying program, known as quantitative easing, to keep downward pressure on long-term interest rates, support mortgage markets and ease credit.

The FOMC reiterated that it would maintain its ultra-loose policy until the outlook for the job market improved “substantially” in a context of price stability.

With the unemployment rate at 7.6 percent amid lackluster 2.5 percent growth, it is unlikely the jobless rate will fall below the central bank’s 6.5 percent threshold for considering tapering off its stimulus any time soon.

The central bank’s remark came as US companies hired the fewest employees in seven months last month, while manufacturing growth slowed to a crawl, suggesting the economy has run into a soft patch as budget-cutting in Washington starts to bite.

Businesses added 119,000 employees to their payrolls last month, according to the ADP National Employment Report released on Wednesday, short of economists’ expectations for 150,000 jobs and the smallest gain since September last year.

The slowdown was primarily due to the effect of tighter fiscal policy through a combination of an increase in payroll taxes at the start of the year and the US$85 billion government spending cuts that took effect across the board in March, said Mark Zandi, chief economist at Moody’s Analytics, which jointly develops the ADP report.

“They are starting to bite and starting to weaken growth,” Zandi said. “It’s affecting all industries and almost all company sizes.”

Two separate reports on manufacturing also showed employment slowed last month as growth in the sector pulled back. Analysts said there was some risk today’s larger employment report from the government could disappoint.

Financial data firm Markit said its final US Manufacturing Purchasing Managers Index slipped to 52.1 from 54.6 in March. It was the lowest final reading since October last year. Readings above 50 indicate expansion.

Another report showed construction spending fell 1.7 percent to an annual rate of US$856.72 billion, the lowest since August last year, according to the US Department of Commerce.

The drop could cause the first-quarter economic growth estimate to be trimmed from a first reading of 2.5 percent.

Demand for cars also waned last month, with US auto sales slowing to their lowest monthly pace since the fall last year.

The FOMC, led by US Federal Reserve Chairman Ben Bernanke, said it continued to see downside risks to the economic outlook. It said it would step up or rein in the bond purchases if conditions warranted.

“The committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes,” it said.

The Fed policymakers reiterated that inflation was not a significant concern, saying it was running “somewhat below” the FOMC’s 2 percent objective and they expected it to stay at or below that level over the medium term.

“When the committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2.0 percent,” the FOMC said.

Kansas City Federal Reserve President Esther George was the sole FOMC dissenter for the third meeting in a row, citing concerns that the high level of stimulus raised the risks of inflation and financial imbalances.