Fed to mull weak in­fla­tion but no pol­icy move

The Pak Banker - - FRONT PAGE -

Weak in­fla­tion is ex­pected to be the key topic when the Fed­eral Re­serve opens a two-day mon­e­tary pol­icy meet­ing Tues­day, its first since its his­toric in­ter­est rate rise in De­cem­ber. Com­ing less than a week af­ter the Euro­pean Cen­tral Bank sig­naled it could ex­pand stim­u­lus mea­sures in March if in­fla­tion slows fur­ther, the Fed is not ex­pected to take any pol­icy ac­tion.

With its first in­ter­est rate in­crease in over nine years in place for just six weeks, the Fed­eral Open Mar­ket Com­mit­tee, the Fed's pol­icy board, will con­tinue to study how it im­pacts the US and global economies. But nerve-wrack­ing global mar­ket volatil­ity and plung­ing oil prices should have the US cen­tral bankers re­view­ing the mea­sured con­fi­dence they ex­pressed last month af­ter lift­ing the near-zero bench­mark fed­eral funds rate by a quar­ter point.

Sig­nif­i­cantly, since the De­cem­ber meet­ing sev­eral Fed of­fi­cials have made clear they view de­fla­tion­ary pres­sures as a sig­nif­i­cant risk de­spite other signs, like job cre­ation, that point to firm eco­nomic growth. Oil prices fell by nearly 20 per­cent in the four weeks af­ter the last FOMC meet­ing, and al­though Fed of­fi­cials have said they ex­pect the im­pact of weak oil prices to be tran­si­tory, there is still no clear bot­tom for the crude mar­ket and, in turn, the drag­down on in­fla­tion. So eyes will be on how the FOMC's pol­icy state­ment as­sesses the risks that prices broadly could con­tinue to fall. "With global equity mar­kets down sub­stan­tially over the last sev­eral weeks, the US dol­lar reach­ing new cycli­cal highs, and a clouded in­fla­tion out­look, the FOMC state­ment should strike a more cau­tious tone," said Deutsche Bank US econ­o­mist Joseph LaVorgna in a client note.

In De­cem­ber the FOMC's fore­cast im­plied four quar­ter-point rate in­creases through this year to end with the bench­mark fed­eral funds rate around 1.25 per­cent. But if in­fla­tion re­mains as weak as it ap­pears, rates could rise much more slowly.

The global out­look has dimmed in re­cent months, with the great­est con­cern about slow­ing growth in China and stalls in other large emerg­ing-mar­ket economies such as Brazil and Rus­sia.

Last week the In­ter­na­tional Mon­e­tary Fund cut its fore­cast for global eco­nomic growth this year to 3.4 per­cent, an im­prove­ment from 3.1 per­cent in 2015 but still 0.2 per­cent­age point below what it pre­dicted in Oc­to­ber. It pro­jected the United States would grow only 2.6 per­cent, 0.2 per­cent­age point less than pre­vi­ously ex­pected due to the strong dol­lar's hit on US ex­porters.

US jobs growth was solid in De­cem­ber and un­em­ploy­ment held at a seven-year low of 5.0 per­cent. But there were some signs of weak­ness in con­sumer spend­ing and in­dus­trial spend­ing. US con­sumer prices fell last month over­all, and core prices, strip­ping out food and fuel, rose only 0.1 per­cent. The Fed has kept mon­e­tary pol­icy very loose aim­ing to push in­fla­tion up to around 2.0 per­cent. So far, that tar­get re­mains elu­sive.

Last week ECB chief Mario Draghi made clear weak in­fla­tion was a pol­icy con­cern. He said the ECB was "de­ter­mined" to do ev­ery­thing in its power to push eu­ro­zone in­fla­tion back to its sim­i­lar tar­get of just below 2.0 per­cent.

"We have the power, will­ing­ness and de­ter­mi­na­tion to act. There are no lim­its how far we are will­ing to de­ploy our pol­icy in­stru­ments within our man­date," Draghi said. In Ja­pan, the cen­tral bank -- which meets on Thurs­day and Fri­day -- is also re­ported to be wrestling with de­fla­tion­ary pres­sures.

Even so, said LaVorgna, with only a few weeks' ex­tra data to add to the pic­ture, the FOMC is not likely to pub­licly al­ter its view of the com­ing year. "It is too early for Fed of­fi­cials to sig­nal greater con­cern about the growth out­look," he said.

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