Fed looks past a world in turmoil, confident in US recovery
WASHINGTON: US central bankers have looked beyond a global deflation threat, fear of energy-sector bond defaults, and a surge of oil patch layoffs to reach what appears to be a firm conclusion: the US recovery is here to stay. New trade data released on Wednesday and signs of everstronger consumer spending confirmed the United States remains the bright spot in a global economy plagued by uncertainty. The trade deficit shrank in November to less than $40 billion, providing a boost to growth as Americans spent less on imported oil. Meanwhile, the first corporate reports from the Christmas season showed at least some of that money trickling into stores as J.C. Penney Co Inc. (JCP.N) said same-store sales rose 3.7 percent in November and December, pushing the company's stock up nearly 20 percent. At its December policy-setting meeting, according to minutes released on Wednesday, the Federal Reserve took close stock of plunging world oil prices and turmoil in Europe and decided that those negative trends would not undo that underlying strength.
"Several participants ... suggested that the real economy may end up showing more momentum than anticipated, while a few others thought that the boost to domestic spending coming from lower energy prices could turn out to be quite large."
The minutes set the stage for what could be a key economic theme this year: how the global system will react as Fed policy diverges from that of other major central banks. The European Central Bank and the Bank of Japan are expected to further loosen monetary conditions in coming weeks or months, while the luster has fallen from emerging markets that had been attracting record levels of investment in recent years.
"These minutes defined the environment post-tapering," said Robert Tipp, chief investment strategist at Prudential Fixed Income in New Jersey. "If the Fed moves aggressively it would suck up capital from emerging markets."
Global conditions have arguably weakened since the Fed's Dec. 16-17 meeting, and the minutes note that the United States would not be immune if the world economy turns sharply down. There is already fallout. Credit analysts have honed in on the debts of companies involved in oil and gas exploration and production, with Standard & Poor's downgrading half a dozen firms at the end of 2014 and concluding the entire sector will be under pressure if prices remain so low.