More Fed Watching Ahead As Fed Decides Fate of Quantitative Easing

feddcFollowing a volatile week that took its cues from growing speculation about the Federal Reserve’s monetary stimulus program and a rising Japanese yen, the market is poised to remain cautious ahead of the upcoming Fed meeting on Tuesday and Wednesday as it awaits for clarification about when the Fed may taper its $85 billion bond buying program aimed lowering interest rates and stimulating the U.S. economy.

The S&P 500 has pulled back 2 percent since Fed Chairman Ben Bernanke’s May 22nd question and answer session on Capitol Hill when he admitted the Fed could in the next few meetings take a step down in their pace of purchases if they see continued improvement in the economy and confidence it will be sustained.

Given the current low U.S. inflation level of one percent that is solidly below the Fed’s inflation target of 2 percent along with modest U.S. employment data, there are growing expectations that the Fed will decide to maintain its current stimulus program through December and possibly even until 2014 rather then curtail their purchases earlier in September.

St. Louis Fed President James Bullard commented last week that “inflation has surprised to the downside” and “low inflation may give the FOMC more leeway to continue its aggressive asset purchase program.”

“Labor market conditions have improved since last summer, suggesting the Committee could slow the pace of purchases, but surprisingly low inflation readings may mean the Committee can maintain its aggressive program over a longer time frame,” Bullard noted.

How soon the U.S. unemployment level will decline could sway the decision about when and how quickly the Fed scales backs its quantitative easing program, which is driving down long-term interest rates and keeping the Fed funds target rate near zero until the unemployment level, currently at 7.6 percent, falls to 6.5 percent.

Steady gains in non-farm payroll job reports over the past six months has shown averaged job gains over 194,00 per month compared with averaged monthly gains of 140,000 in the previous six months.

International Monetary Fund Lowers U.S. Growth For 2013

Last Friday all three major U.S. equity indexes declined following comments from IMF President Christine Lagard about lower U.S. growth in 2013 due to current fiscal policies with sequester cuts and the U.S. deficit reduction program that deficit hawks remain committed to follow.

“We expect growth this year to be at 1.9 percent, the deficit will likely decline by 2.5 percent, which is very significant, and that will, in our view, shave 1.25 to 1.75 percentage points of growth” Lagard said.

Although the IMF’s outlook for U.S. growth in 2013 is dimmer than some other forecasts, IMF President Lagard sees better growth ahead in 2014.

“Next year, the focus for growth should be better, picking up to 2.7 percent, which will obviously depend on various conditions; one is fiscal adjustment becoming more moderate, two, the housing market continuing to strengthen, and three, continued support for monetary policy” Lagard concluded.

Concerning the Fed’s monetary stimulus program, the IMF supports a policy of accommodative measures from the Fed Reserve that consists of maintaining its current stimulus program.

“In our assessment, there’s no need to rush to exit from monetary accommodations, given the still large output gap, given the subdued growth that we have, and given the well-anchored inflation expectations” Lagard said.

U.S. Fiscal Policy Challenges

Despite the fixation with the Fed’s monetary stimulus program, if the United States wants to lower its unemployment level to 6.5 percent from the current level of 7.6 percent, politicians on Capitol Hill will need to work together in a bipartisan manner and focus less on funding nation-building campaigns in other parts of the world and instead support more private sector jobs by investing in America’s decaying infrastructure.

Once every four years, America’s civil engineers come together through the American Society of Civil Engineers (ASCE) and provide a comprehensive assessment of the nation’s major infrastructure categories in ASCE’s Report Card for America’s Infrastructure.

The Advisory Council in the ASCE is made up of over 30 civil engineers with substantial experience in various types of infrastructure who volunteer their time and expertise for over a year to complete the Report Card.

The 2013 report card grade for the United States shows a comprehensive G.P.A. score of D+, signaling the need for U.S. lawmakers to allocate more capital towards upgrading America’s outdated infrastructure.

Estimated investments for infrastructure projects needed by 2020 is a whopping 3.6 trillion.

“For the U.S. economy to be the most competitive in the world, we need a first class infrastructure system – transport systems that move people and goods efficiently and at reasonable cost by land, water, and air; transmission systems that deliver reliable, low-cost power from a wide range of energy sources; and water systems that drive industrial processes as well as the daily functions in our homes. Yet today, our infrastructure systems are failing to keep pace with the current and expanding needs, and investment in infrastructure is faltering” the ASCE Council wrote.

“We must commit today to make our vision of the future a reality – an American infrastructure system that is the source of our prosperity” the Council concluded.

 

 

 

 

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