Fed likely to maintain credit push

Wednesday, April 29, 2009 at 9:13 PM Posted by Beijing News




The Federal Reserve opens a two-day meeting Tuesday with policymakers expected to keep boosting the supply of cheap credit to support a struggling economy showing only tentative recovery signs.

The Federal Open Market Committee FOMC meeting comes amid a somewhat less bleak economic backdrop, with some improvement seen in the troubled US housing market and consumer confidence.

But Fed members will see a stark reminder of the depth of the recession with data due early Wednesday on first-quarter US economic output -- expected to show a 4.9 percent contraction at an annual pace after the fourth-quarter drop of 6.3 percent.

Analysts say this week's meeting is likely to signal no change in policy since the FOMC March gathering, when the Fed added over one trillion dollars to its arsenal to fight the economic crisis.

The FOMC statement due Wednesday is expected to depict a weak economy that still needs extraordinary support, justifying its policy of near-zero interest rates and vast lending facilities to pump up credit availability.

"The economy remains weak thus it is still too early for the Fed to consider lifting interest rates and possibly sending the economy deeper into recession," said Fred Dickson, market strategist at DA Davidson & Co.

"The Fed statement might temper expectations held by a growing number of investors that the economy is about ready to bottom out and turn the corner."

On Tuesday, a survey by the Conference Board showed US consumers turned considerably more confident in April, with more seeing a bottom taking shape in the recession-stricken economy.

The business research group's consumer confidence index, based on a representative sample of 5,000 US households, leapt to 39.2, up from a revised 26.9 in March, a gain of nearly a point from that month's initial estimate.

In another instance of data not as bad as feared, the Standard & Poor/Case-Shiller index showed an 18.6 percent year-over-year decline in home prices in 20 major metropolitan areas, or a 2.8 percent decline from January levels.

Despite the further drop, S&P said February was the first in 16 months the index did not see a new record drop.

The report was consistent with other data suggesting stabilization in the housing market after two horrific years.

But S&P analyst David Blitzer said, "We will certainly need a few more months of data before we can determine if home prices are finally turning around."

Adolfo Laurenti, senior economist at Mesirow Financial, said the Fed may acknowledge "green shoots" of recovery but not act on this.

"I don't think the Fed wants to create any excessive optimism," he said.

"I think the Fed is encouraged by recent economic data but it is too early to announce any turnaround."

Laurenti said the Fed led by chairman Ben Bernanke will be trying to manage expectations as financial markets await the impact of the central bank's massive stimulus effort.

"We expect the Fed to reiterate its commitment to keeping the Fed funds rate at a low level for an 'extended period' to help reinforce the incipient signs of an easing in the pace of decline," said Josh Heller, economist at RBC Capital Markets.



Rietschel

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