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3/18/13

Fed to signal it will keep punch bowl full


WASHINGTON (MarketWatch) — The Federal Reserve will use its policy meeting next week to try to convince investors that it has no intention of slowing down or ending its ultra-loose monetary policy anytime soon.

Although the economy has looked unexpectedly robust so far this year, “talk of tapering in the near term is nuts,” said Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisors.
Fed Chairman Ben Bernanke and his majority on the Fed are concerned that markets may start to price in some tapering, and higher rates could harm the recovery.
“Market participants always come to expect more tightening sooner than is appropriate for sustained expansion,” said Vince Reinhart, Morgan Stanley’s chief U.S. economist.
The Fed doesn’t want to feed these expectations, analysts said.
“My judgment on where they are now is they do not want to change the broad signals they have sent about policy,” agreed Lewis Alexander, chief economist at Nomura Securities.
Since December, the Fed has been buying $85 billion per month of Treasurys in an open-ended program that it said would continue until there was a substantial improvement in the labor market. It has held its short-term interest-rate target close to zero since December 2008.
Relatively upbeat nonfarm-payroll and retail-sales reports, combined with the rise in the Dow Jones Industrial Average (^DJI) to record highs, has sparked talk of a pullback from the central bank. But Fed watchers believe this is premature and it will be many months before the central bank even contemplates a change in policy stance.
For one thing, the Fed will be wary about the data because in the last few years the economy has looked good in the first few months of the year, only to fade after spring arrived.
Reuters Federal Reserve Board Chairman Ben Bernanke testified to Congress in February.
This year, higher payroll taxes are going to bite in the next few months, according to Pantheon’s Shepherdson.
“The markets have gotten blase. But unless the economy is really charging along, you can’t have fiscal policy slow growth by 1.75 percentage point and expect nothing,” Shepherdson said.
People have also misread the minutes from the recent Fed meetings, he said.
At its meeting January, the minutes noted that “a number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred.”
Some took this as a sign the Fed was close to tapering the purchases. But the minutes fail to differentiate between the voters and non-voters.
Fed bank presidents only share four of the 12 voting spots on the interest-rate setting Federal Open Market Committee.
Morgan Stanley’s Reinhart said there are two camps at the Fed on bond-buying: “those who think it can make a difference and those who think it is a pact with the devil.” The minutes overstated the importance of QE opponents, who are in the minority, he said.
There is a robust debate on Wall Street over the costs and risks of quantitative easing.
In testimony to Congress last month, Bernanke “offered nothing” to opponents of bond buying, Shepherdson said.
While there are risks, “at this point they’re not of sufficient concern that they outweigh the important benefits of trying to support a continued recovery,” Bernanke told the House Financial Services panel.
The Fed said that a review of the costs and benefits would take place at the March meeting.
Shepherdson said the economic outlook wouldn’t be clear until the fall at the earliest. “And is Bernanke going to jump as soon as it becomes clear? No,” he said. “They are going to continue it right through the year.”
The central bank will release its policy statement at 2:00 p.m. Eastern Wednesday, 15 minutes earlier than prior practice. Bernanke will hold a press conference at 2:30 p.m. The Fed will also release updated forecasts.
Nomura’s Alexander said the Fed statement may try to give some more detail about the asset purchases. He said the forecasts will be important to get a sense of how the central bank views the latest data.

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