The Federal Reserve held tight on Tuesday to its $600 billion program of buying bonds to keep long-term interest rates low, but said it still plans to end that program in June and said the economy "is on firmer footing."

In a much-anticipated announcement, the Fed acknowledged that the economic recovery is gaining more strength and injected a new note of caution about inflationary pressures.

The bottom line, as investors had expected, is that the Fed will still keep short-term interest rates near zero for "an extended period."  But the central bank clearly signalled that it is approaching the end of one of the most controversial chapters in its history -- the use of "quantitative easing,'' or creating vast amounts of money out of thin air -- to pull the economy out of the Great Recession.

The most notable feature of the Fed statement on Tuesday was its caution about inflation.   Though the central bank still contends that inflation is actually a bit lower than it would like, it noted on Tuesday that "the prices of energy and other commodities are currently putting upward pressure on inflation."   It said it still expects those effects to be "transitory,'' but said it would "pay close attention to to evolution of inflation and inflation expectationss."

That was a fairly clear nod to inflation hawks on the Fed's policy-making committtee, and it signalled that the dynamics are shifting from a fear of recession to a concern about rising prices.

Turning points in monetary policy are always fraught with uncertainty because the economy puts out confusing signals as a recovery takes hold.  But analysts say that the Federal Reserve's next move will be especially tricky: The recovery has picked up steam at the same time that it is being buffeted by shocks from soaring oil prices, turmoil in the Mideast, and now a catastrophe of undetermined magnitude in Japan.

Ben Bernanke, chairman of the Federal Reserve Board, has said that the economic recovery seems to be reaching a self-sustaining pace. But he has also cautioned that conditions are fragile and that it is too early for the Fed to declare the mission accomplished. For practical purposes, that means that the Fed will continue to keep short-term interest rates near zero for some time to come.

The international crises in the Middle East and Japan complicate the Fed's job, though. The more serious the fallout – literally and figuratively – the weaker the economic recovery is likely to be. That could convince some members of the Federal Reserve Board to push to delay any tightening of monetary policy.

Bernanke has been able to muster solid support among Fed policymakers for his easy-money policies. But conservatives on the policy-setting Federal Open Market Committee have become increasingly vocal about wanting to tighten policy soon to head off a possible jump in inflation.

The Fed's carefully scrutinized meeting statement contained virtually all of the language from the central bank's January communiqué, except for a few changes to note improvements in economic indicators and deterioration in global events since its December meeting.

The Fed left its assessment of inflation essentially unchanged. The central bank acknowledged again that commodity prices have been rising, but the statement said that "longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward."

Even before the recent turmoil in oil-producing countries, Republican lawmakers and conservative economists had accused the Fed of trying to debase the dollar through quantitative easing and had raised concerns that the money-printing program could spark runaway inflation, even though in the near-term, high inflation is unlikely.

www.nationaljournal.com/federal-reserve-enters-final-lap-of-easing-policy-20110315

• Go Back

Related in this Category