* Fed meets on April 24-25, wait-and-see approach expected
* Vocal hawks suggest further bond buys far from imminent
* Rates guidance may be Fed’s preferred policy tool
By Pedro Nicolaci da Costa
WASHINGTON, April 16 (Reuters) – The U.S. Federal Reserve is
independent but it does not exist in a vacuum, as waning
appetite at the central bank for contentious bond purchases
suggests.
Minutes from the Fed’s March meeting released this month
showed support thinning for further bond purchases. Officials
are unlikely to develop any more appetite for them by their
meeting next week, despite disappointing March jobs figures.
Policymakers have been heartened by patches of better
economic data that raised hopes for solid growth this year,
which helps explain their reticence toward further monetary
stimulus.
“The state of the economy doesn’t argue for them to do more
stimulus but it also doesn’t warrant them doing less,” said Ann
Owen, a former Fed economist now at Hamilton College in Clinton,
New York.
Officials are also leery of a barrage of anti-bond-buying
sentiment both at home and abroad, with Republicans criticizing
the Fed for weakening the dollar and developing countries
arguing that the weaker currency gives U.S. exporters an unfair
advantage.
Even within the Fed, hawks are making plenty of noise, not
only about the possible detrimental effects of further
quantitative easing, but also about the likely need to begin
raising interest rates soon. For some, that means within months.
“A number of officials are very vocal in their expectations
of tighter policy sooner than later,” said Tim Duy, an economics
professor at the University of Oregon and author of a popular
blog on the Fed. “I don’t think they would be so vocal if they
thought there was likely to be a policy shift (in the opposite
direction) in the near term.”
That minority chorus diverges sharply from the broader
message coming from the policy-setting Federal Open Market
Committee. Officials will likely hold to that message at their
April 24-25 gathering: official borrowing costs look set to
remain near zero until at least late 2014.
That is a timetable Janet Yellen, the Fed’s influential vice
chair, staunchly defended in a speech last week. Her strong
support for Fed rates guidance, the latest step in an effort to
increase policy transparency, suggests the central bank may rely
in shifting that goalpost back and forth as its primary policy
tool until it decides on more decisive action – either further
asset purchases or the start of a policy tightening.
The latest Reuters poll of primary dealers – banks that do
business directly with the Fed – found that 11 of 15 still
believe the central bank eventually will resort to a third round
of bond buys or, in market parlance, QE3.
The U.S. economy expanded at a 3 percent annual rate in the
last three months of 2011 but is expected to have slowed in the
first quarter. Unemployment came down rather quickly, from 9.1
percent last summer to 8.2 percent in March, yet analysts and
Fed officials believe further progress will be tougher to
achieve.
BELLS AND WHISTLES
With interest rates close to zero, the Fed has – as one
trader put it – come to rely on a lot of “bells and whistles” to
influence the economy.
The April meeting is a case in point. The Fed will release
its usual policy statement at noon, likely making only small
tweaks to its assessment of the economic backdrop.
It will then release an update of its quarterly economic
forecasts, as well as an outline of policymakers’ individual
estimates for when interest rates should be raised.
In addition, Fed Chairman Ben Bernanke will hold a news
conference at which he will be bombarded with questions about
the prospect for further easing.
He is likely to keep his options open. The Fed appears to be
taking a wait-and-see approach, trying to gauge whether the
relatively brighter economic signs of recent months prove
lasting.
The central bank’s subsequent policy meeting in June may
prove more critical. Its most recent effort to keep down
long-term rates by selling short-term securities and buying
longer dated ones is set to expire at the end of June.
Atlanta Federal Reserve Bank President Dennis Lockhart, a
policy centrist and 2012 FOMC voting member, told reporters last
week the Fed would watch the bond market closely as the program
ends to see if yields are pressured higher. But he added that
the bar remains high for another round of monetary easing.
(Reporting by Pedro da Costa; Editing by Dan Grebler)
