US Fed to meet as global crises loom large

The US Federal Reserve building
© AFP/File Karen Bleier

AFP

WASHINGTON (AFP) - The Federal Reserve's top policymakers meet Tuesday with an upbeat US economic outlook clouded by a devastating earthquake and tsunami in Japan and unrest in the Middle East.

The Fed's rate-setting panel is expected to keep stimulus policies in place -- including ultra-low interest rates -- even as unemployment eases, consumer spending picks up and businesses grow more optimistic.

"We anticipate a more upbeat assessment of the economy and a less pessimistic tone towards the labor market," said Fabio Fois of Barclays Capital.

The Fed is expected to continue to unfurl a $600 billion stimulus spending designed to jolt the US economy back to full health, but one which critics warn is a risky gambit that is stoking inflation.

The Fed is expected to wave off concerns about rising prices, which have only been fueled by fighting in Libya that has pushed up the cost of oil.

With Americans struggling to pay gasoline prices that have risen around 43 cents a gallon (3.8 liters) in the last month to an average of $3.54, the Fed has insisted that core inflation remains in check.

The Fed's measure of inflation ignores volatile food and energy prices, which are often the costs most keenly felt by consumers.

On Friday the head of the powerful New York Federal Reserve, William Dudley, said inflation levels remained well below the two percent rate which the bank says spells a healthy economy.

"Inflation expectations are well-anchored today and we intend to keep it that way," Dudley said.

But as the economy improves, pressure is building on the Fed to ease its stance.

The central bank "will have to change its inflation language," John Ryding and Conrad DeQuadros of RDQ Economics said in a client note.

"Core inflation has stabilized and picked up slightly, oil and commodity prices have increased significantly, and inflation expectations have risen."

"The Fed, we believe, is on the wrong side of the inflation story."

But events in Japan may have eased pressure on the Fed to reverse course.

The economic impact of a massive earthquake and tsunami in Japan -- the world's third-largest economy -- is still unknown, although few believe a serious spillover is likely.

"Our early assessment is that Japan's GDP will take a hit for a quarter or two, but then bounce back as reconstruction gets into gear," said Patrick Newport of IHS Global Insight.

But coupled with rekindled sovereign debt crisis in Europe that saw Spain and Greece's sovereign ratings downgraded in the past week, and rising oil prices, the potential exists for an external brake on US growth.

Against this backdrop the Fed is expected to stand pat.

"The economic outlook has improved considerably in the past six months," according to Dudley that was the aim of the Fed's strategy "this is welcome and not a reason to reverse course."

But some experts believe the Fed might soon do just that.

"This is likely to be the last gathering before the Fed has to begin prepping the markets for the end of QE2," said Stephen Stanley of Pierpont Securities using the jargon name for the Fed's easy monetary policy -- quantitative easing.

© AFP -- Published at Activist Post with license

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ACDC 2010 Call for Papers

Fourth Annual Conference on Development and Change
Johannesburg, South Africa, April 9–11, 2010

Conference Theme
The world economy is currently in the throes of a global economic crisis reminiscent of the great depressions of the 1930s and possibly that of the 1870s. As back then, the crisis resulted from major structural imbalances in financial and credit markets ultimately resulting in a retreat from free trade. Emergent debates about resurgent protectionism, alternative reserve currencies, stimulus packages and climate change policies suggests that the world economy has entered a phase of heightened change which will transform the development "equation" in varied and diverse ways. It is imperative at this time that development economists should engage with two crucial questions: the implications of these changes for the developing world and the prospects for "development" for the majority of people in the developing world.

The forthcoming conference invites submission of academic papers representing original and critical research focusing on the various aspects of the current global economic crisis. Papers are encouraged to employ historical and comparative perspectives where possible, on the impact of the current global financial and trade crises and its impact on the economic performance of developing countries. A focus on policy relevance and prescriptions for developing countries is highly recommended.

Contact conference director Ashwini Deshpande or visit Policy Innovations to download the full details. The deadline has been extended to February 10, 2010.

Financial Crisis Now an Economic Crisis

This may seem subtle and even obvious but this point occured to me today while reading an article by Daniel Gross in Slate on Secretary Geithner's speech about the bailout. The hostile punditry and market response seemed premature to me, given the fact that his speech could have been a lot worse and the Obama team has only been in office a couple of weeks.

But back to the point: It appears we in the United States and elsewhere are moving from a financial crisis to a real economic crisis. Words matter when considering policy.

Here is Gross's final paragraph. You can follow the links:

The great challenge for Obama now is that the economy at large is beginning to resemble the financial sector. The latest readings on job losses, auto sales, and overall economic growth show an economy that is spiraling downward. Politicians may be hoping that the economy is like a bungee-cord jumper, who, after experiencing a sickening drop, experiences great relief as he bounces back sharply. But they might want to temper the promises they make about recovery. Many economists believe we need a bigger stimulus package, not a smaller one. Obama's rhetoric about recovery may be reassuring, but, at this point, Geithner's pessimism is more credible.