The Federal Reserve on Wednesday is expected to reaffirm its intention to keep US interest rates at ultra-low levels for a long time to support the economy, even as signs of recovery accumulate.
The US central bank cut overnight rates close to zero percent last December and it has vowed to keep them there for an “extended period.” While some analysts think the Fed could start to tip-toe away from that pledge, most say it is too soon.
“Once they start removing that, that's a real sign that they intend, within six months, to start raising rates,” said Deutsche Bank economist Torsten Slok. “But it's just premature, looking at the economic numbers, to arrive at that conclusion.”
Analysts expect the Fed to nod to modestly encouraging signs suggesting the economy is gaining strength, but still expect a cautious tone on policy.
Policy makers will need to take into account the economy's faster-than-expected 3.5% annualized growth rate in the third quarter, which effectively signaled the end of the most painful recession since the 1930s. Suggesting further momentum, data on Monday showed manufacturing activity hit its highest level in 3-1/2 years last month.
Improved third-quarter corporate earnings have also fed optimism that the upturn can be sustained next year even after government help has dried up.
In an act underlining rising confidence in the recovery, billionaire investor Warren Buffet on Tuesday said his company, Berkshire Hathaway Inc, agreed to purchase the nation's largest rail company, saying it is poised to benefit from the recovery.
Fed officials in recent weeks, however, have sent the message that while the outlook has improved, the recovery is likely to be sluggish and needs continuing support.
Unemployment is expected to climb above 10% before the labor market improves, damping the consumer spending that accounts for around 70% of US output. The banking system is still under pressure from loan losses, and credit remains tight.
“We have to think about our exit policy and are looking at it very carefully, but at the moment, that's not our first order concern. At the moment, it's policy accommodation,” Chicago Federal Reserve Bank President Charles Evans, a voter on the Fed's policy-setting panel, said on October 22.
Other central banks are also wrestling with how best to spur growth and when to withdraw extraordinary measures to support their economies.
The European Central Bank is expected to keep rates on hold at a record-low 1% on Thursday, while there is a good chance the Bank of England will expand its large asset purchase program at a meeting the same day.
Most analysts at top US banks expect the Fed to keep interest rates on hold until mid-2010 or later, although interest rate futures markets are pricing in an increase earlier in 2010. (Reuters)