Fed Reserve In Focus As Market Searches For Clues About Monetary Easing

messageOn Wednesday morning Fed Reserve Chairman Ben Bernanke will speak before the Joint Economic Committee of Congress at 10:00 a.m. as investors clamor for signs about whether the Fed plans to taper its $85 billion in bond purchases each month in its third round of quantitative easing.

Bernanke’s comments about the state of the economy are expected to cause ripple effects in the markets. Later in the day, the Fed will release Fed Minutes that highlight the overall sentiment of the Fed towards the U.S. economy.

The central bank will meet again to debate Fed policy on June 18-19.

As the U.S. economy shows signs of improvement in the labor market along with a clear upswing in the housing market and a buoyant stock market that is reaching record highs, many investors are seriously questioning whether there is a need for extended quantitative easing to stimulate the U.S. economy while the Fed extends its balance sheet to over 3 trillion.

That positive sentiment was bolstered last week by San Francisco Fed Reserve Bank Chairman John Williams who said last week during a speech in Portland, “We could reduce somewhat the pace of our securities purchases, perhaps as early as this summer.”

The U.S. unemployment level in April dropped to 7.5 percent, the lowest level since 2008.

The Department of Labor reported that 165,000 jobs were added to the U.S. economy in April, beating the consensus forecast of 140,000 after a revised 138,000 jobs gain for the month of March.

In April it was also reported that U.S. inflation rose to just 0.9 percent, the smallest increase since early 2012 and safely below the Fed’s inflation target of 2 percent.

A low inflation environment is typically viewed as fertile ground for continuing quantitative easing.

U.S. GDP figures for the 1st quarter in 2013 show the U.S economy grew 2.5 percent compared with 0.4 percent in the fourth quarter of 2012.

Yesterday Federal Reserve Bank of New York President William C. Dudley, an influential Fed member who is viewed as close to Chairman Bernanke, said that policy makers will know more in the next few months about whether the U.S. economy is strong enough to keep recovering during the midst of a tighter fiscal environment that is currently undergoing federal sequester cuts.

“Because the outlook is uncertain, I cannot be sure which way, up or down, the next change will be” Dudley admitted.

During a recent Bloomberg interview with Bloomberg Senior Economist Michael McKee, aired today on Bloomberg Surveillance, Dudley reiterated that view.

“I guess the way I would characterize it Mike is I am uncertain about what’s going to happen to the economic outlook over the near term because I really don’t understand really well how the tug of war between the fiscal drag and the improving economy are going to work themselves out over the next couple of months” Dudley said.

“I think three or four months from now you will have a much better sense of is the economy healthy enough to overcome the fiscal drag or not” Dudley added.

Later in the interview, Dudley emphasized that if the U.S. has an improving labor market supported by stronger economic activity and a substantial improvement in the outlook, then it will be the right time to start dialing down the rate of purchases.

St. Louis Fed Reserve President and CEO James Bullard echoed that sentiment during a speech yesterday in Frankfurt, “I can’t envision a good case to be made for tapering unless the inflation situation turns around and we are more confident than we are today that inflation is going to move back toward target.”

 

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