Fed Expected to Keep Rates Low
Once again positive US economic data has led to speculation among traders and investors about when the US Federal Reserve will raise rates. It is widely believed that raising rates would signal an exit from the current recession. The Fed will meet this week and is widely expected to end the year by keeping rates at historic lows for an extended period. The Fed policy meeting will take place on Monday and Tuesday and it has been about a year since the Federal Reserve benchmark interest rates to near zero to fight the worst economic crisis since the great depression of the 1930’s. Despite the desire of many to see rates raised the Fed has said that high unemployment and stalled credit markets point to a slow prolonged recovery. Julie Coronado of BNP Paribas said, “When the Fed looks at the economic backdrop, they’re looking at the level of economic activity, not just the most recent numbers and we’re still at 10 percent unemployment. We’re still a long, long way from normal.”
Some Fed Members Cautious
Financial markets are expected to monitor the Fed meeting closely looking for any mention of a possible rate increase. The better than expected jobs report led many to believe that the Fed may raise rates sooner than thought. About the expected Fed statement Mark Gentler professor at New York University said, “The statement will probably look like the previous one … I think the core of the committee is still more worried about the recovery solidifying,” Despite the raft of positive data many Fed members remain cautious. Philadelphia Federal Reserve Bank President Charles Plosser emphasized that one month of data does not equal a trend.
Fed May Extend Asset Purchase Program Past Deadline
The Fed committee may also discuss whether to extend its $1.25 trillion mortgage-backed securities purchase program past its March expiration date. Investment manager Bill Gross of Pacific Investment Management Co remains unconvinced that the Fed’s extraordinary measures will end according to schedule. Gross stated, “There are so many uncertainties and I think the Fed recognizes that, and not just from the standpoint of the policy rate but the standpoint of quantitative easing.”
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