(AFP) – Dec 14, 2010
WASHINGTON — A slightly brighter outlook and deal to extend tax cuts are unlikely to change the Federal Reserve's stimulus policies and record-low lending rates when its top policy-setting panel meets Tuesday.
As the Fed's November decision to pump 600 billion dollars into the ailing US economy gets into full swing, investors will search for clues on moves beyond the latest round of "quantitative easing."
The Federal Open Market Committee was widely expected to maintain interest rates at historically-low near-zero levels.
"The FOMC may start to provide hints that it is prepared to be flexible in terms of the size and timing of the QE2 program, indicating that it could be ramped up or ramped down depending on the performance of the economy and other supporting fiscal policies," said analyst Katherine Smith of IHS Global Insight.
Federal Reserve boss Ben Bernanke has indicated the asset purchasing plan is flexible.
"It depends on the efficacy of the program. It depends, on inflation. And finally it depends on how the economy looks," Bernanke said in an interview on CBS television earlier this month.
When FOMC members sit down to review the outlook of the world's largest economy in their last meeting of the year, they will face a cautiously brighter outlook.
In its report published ahead of of the FOMC meeting, the central bank saw continued improvement in the US economy, albeit with several major potholes.
"The economy continued to improve, on balance" through the reporting period from early October to mid-November, the Fed said in its Beige Book report gathering information from the bank's 12 districts last week.
Manufacturing activity, which has been a key driver in a weak recovery from the worst recession in decades, continued to expand in almost all the districts, the report said.
However, the battered housing market showed little sign of a turnaround.
And the biggest concern facing Bernanke remains the stubbornly high -- and rising -- unemployment rate, which jumped last moth 0.2 percentage point to 9.8 percent.
At the same time, a massive tax cuts deal which was set to be approved in the Senate after painstaking negotiations between President Barack Obama and his Republican rivals was expected to bolster the economy next year.
The tax deal would extend by two years a series of massive tax cuts enacted in 2001 and 2003 under president George W. Bush with a built-in January 1, 2011 expiration date, and would provide an extension of jobless benefits.
Experts believe the deal, which reduces taxes for all income classes, will increase gross domestic product next year by 0.5 to one percentage point to around three percent as Americans will have more money to spend.
The tax deal "reduces the likelihood of additional central bank asset purchases, though we expect the Fed to complete the purchases already scheduled," said analysts at Charles Schwab.
"The Fed won't refer to the tax compromise in its statement, but after it is made law, policymakers will likely adjust forecasts for 2011 and 2012," they said.
But on the eve of the FOMC meeting, ratings agency Moody's warned the United States will put its top level credit rating at risk if Congress extends the tax cuts package.
"Unless there are offsetting measures, the package will be credit negative for the US and increase the likelihood of a negative outlook on the US government's Aaa rating during the next two years," said Moody's Steven Hess.
The threatened outlook revision would be one step short of a full downgrade, but could nonetheless rock global financial markets and see Washington's cost of borrowing soar.
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