Fed likely to keep tabs open

WASHINGTON - FEDERAL Reserve policymakers meet on Tuesday amid rising signs the recession is receding but they are not expected to ease aggressive efforts to boost growth until recovery is well under way.

THE upbeat US economic outlook gained support from better-than-expected recent government readings on growth and unemployment.

Gross domestic product (GDP) - the broad measure of the economy's activity - fell at an annualised rate of 1.0 per cent in the second quarter, after a 6.4 per cent plunge in the January-March period.
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The Federal Open Market Committee (FOMC) meeting on Tuesday and Wednesday is widely anticipated to hold unchanged its key federal funds rate at a historically low range of zero to 0.25 per cent to spur lending and economic activity.

Economists say the financial markets will be closely watching the FOMC's statement accompanying its interest rate decision on Wednesday for clues about the momentum of the world's largest economy, which seems to be emerging from the worst recession since the Great Depression.

Amid the growing optimism that recovery is at hand, the markets will be focused on whether the Fed, led by chairman Ben Bernanke, will adjust its unprecedented efforts to pump over one trillion dollars of liquidity into the stricken financial system, which some call 'quantitative easing.'

'Considering that the US economy remains in a fragile transition to recovery, we do not expect any surprises. The likelihood is that interest rates along with the Fed's asset purchase programmes will remain unchanged,' said Drew Matus, senior US economist at Merrill Lynch.

Brian Bethune and Nigel Gault of IHS Global Insight also said they expected no change in the target range for the federal funds rate, the overnight rate banks charge each other for using their Fed balances, which broadly impacts borrowing rates.

'Although the Fed's programmes to purchase Treasury bonds and mortgage debt are not expected to be changed, the Fed's total balance sheet is expected to continue to shrink on net over the next several months,' they said. 'The Fed's exit strategy is already in motion,' they added.

Analysts expected the FOMC statement would be scrutinised for news about the Fed's US$300 billion (S$433 billion) Treasury purchase programme.

'The Federal Reserve is on pace to complete this programme by mid-September and that would make this the last opportunity at a scheduled meeting for the Fed to enlarge this programme,' Merrill Lynch analysts wrote in a client note.

'Despite the recent decision by the Bank of England to grow their purchase programme, we do not look for the Fed to follow suit,' they added, noting that the programme 'was not effective in driving rates lower on a sustained basis.' -- AFP