Glimmers of a revived economic recovery are expected to give the US Federal Reserve some breathing space when its top committee meets tomorrow, avoiding a renewed battle inside the central bank.
Members of the Fed’s policymaking panel will gather for the last time before November’s mid-term elections, with the economic outlook transformed since their last meeting from apocalyptic to vaguely promising.
The Federal Open Market Committee (FOMC) is expected anchor the fragile recovery by promising to leave interest rates at historic lows and keep stimulus spending at current levels.
However, with the economic picture brightening, it is expected to hold off from dramatic increases in spending designed to speed up growth.
“We see the improved data as buying time for the Fed to sit on the sidelines at the September FOMC meeting,” Michael Gapen of Barclays Capital said.
The US economy, after months of languishing in the doldrums, has regained some momentum since the Fed met at the end of June, when members expressed concern about a “sluggish” economic recovery.
In July and last month, private firms continued to add jobs, albeit at pace that was too slow to offset the loss of tens of thousands of US Census taking jobs. A rapidly narrowing trade deficit and recovering consumer prices have also pointed to a tempered, if tepid, recovery.
Most economists now expect the economy to grow faster in July, last month and this month than the previous three months. That could help avoid a showdown at the Fed over the need for more stimulus.
At recent meetings Fed members have tussled over how and when to restart even modest crisis measures, which some fear would send the wrong signal to financial markets and forestall a return to normal monetary policy.
While “all but one member” agreed on the need to reinvest crisis spending that had expired, minutes showed deep divisions about the impact these measures would have.
Any move to increase stimulus spending would likely deepen divisions, especially if the case for action was not clear cut.
Given this, many analysts believe a shift in policy will not now come until the Fed’s November or December meetings, and will be contingent on signs that the economy is in deep distress.
“We believe the bar for further stimulus includes some combination of below-trend growth in real GDP, a worsening labor market, and heightened deflation probabilities,” Gapen said.
But not all economists were convinced that the Fed should wait.
“The ‘better-than-expected’ tone of many recent indicators says more about the gloom that has overtaken the markets than it does the improvement in economic fundamentals,” David Resler of Nomura Securities said. “Marginally stronger economic data have not altered the case for a new round of quantitative easing and we see no compelling reason to wait.”
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