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View Full Version : Fed Pledges to Keep Low Rates for ‘Extended Period’



StackerKen
28th April 2010, 03:59 PM
April 28 (Bloomberg) -- Federal Reserve officials restated their intention to keep the benchmark interest rate near zero for an “extended period” and saw signs of life in the job market.
“The labor market is beginning to improve,” the Federal Open Market Committee said in a statement today in Washington, after last month saying it was “stabilizing.” Officials also said growth in household spending has “picked up recently.”
Chairman Ben S. Bernanke is contending with an unemployment rate that has been stuck at 9.7 percent for three straight months even as payrolls started to grow. Fed officials repeated that inflation is likely to be “subdued” and that consumer spending is held back by tight credit and weak income growth.
“You have got sub-comfort-zone core inflation with a high volume of labor-market slack,” Michael Darda, chief economist at MKM Partners LP, said in a Bloomberg Television interview. “The Fed would rather be a little bit behind the curve and play catch up later than move too soon.”
Treasury notes fell and stocks rose after the decision. The Standard & Poor’s 500 Index gained 0.7 percent to close at 1,191.36 in New York. Two-year Treasury notes fell, pushing up the yield 2 basis points to 1.02 percent. A basis point is 0.01 percentage point.
Slack in labor markets and resulting limited wage pressures have held down consumer prices. The so-called core inflation rate, which excludes food and energy, was 1.1 percent for the 12 months ending March, down from 1.3 percent in February.
Inflation Expectations
“Economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” today’s Fed statement said.
“The policy guidance was left fully intact,” said Jim O’Sullivan, chief economist at MF Global Ltd. in New York. “The message for now is there is no imminent tightening.”
U.S. central bankers have left the benchmark lending rate in a range of zero to 0.25 percent since December 2008. Their purchases of $1.25 trillion in mortgage-backed securities, which ended last month, boosted the balance sheet to a record $2.34 trillion.
Kansas City Fed President Thomas Hoenig dissented for the third straight meeting. He said “that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of future imbalances and increase risks to longer-run macroeconomic and financial stability” and limit the ability to increase rates “modestly.”
Economic Growth
A surge in corporate profits last quarter was led by demand from overseas and lower labor costs, according to results from S&P 500 companies that have reported earnings this month.
Conditions in financial markets have also improved. Raytheon Co., the world’s largest missile maker, and the finance unit of Royal Dutch Shell PLC led a drop in U.S. industrial company debt yields to 129 basis points more than similar- maturity Treasuries last week, according to Bank of America Merrill Lynch index data.
The spread is one basis point tighter than it was on Aug. 9, 2007, when BNP Paribas SA halted withdrawals from three investment funds near the start of the credit crisis. Industrial company spreads widened one basis point yesterday to 130 basis points.
Forecasts Raised
Economists have raised forecasts from earlier this month as reports showed consumer spending climbed, inventories rose and businesses invested in new equipment. The median estimate of analysts polled from April 1 to April 8 called for a 3 percent growth rate.
Retail sales increased 1.6 percent last month, more than anticipated and the biggest gain in four months, according to figures from the Commerce Department. Stocks of companies that rely on discretionary spending are up. Shares of Chipotle Mexican Grill Inc., a Denver-based Mexican restaurant chain, are up about 53 percent year-to-date. Shares of Starbucks Corp., based in Seattle, have risen 14 percent.
Jobless Rate
“The Fed is unconvinced in the sustainability of the recovery because job growth has been modest,” said Joseph LaVorgna, chief U.S. economist in New York at Deutsche Bank Securities Inc. in New York. “They want to be very certain the economy has gotten traction and the only way to be sure is if the labor market has gotten better over the next few months.”
Officials brought a fresh set of forecasts to today’s meeting. Their outlook for inflation and unemployment, which will be disclosed in three weeks when minutes are released, will offer insights into their estimates of how fast the economy will use up spare capacity.
About 80 percent of S&P 500 companies to have posted first- quarter earnings have topped analysts’ projections, according to data compiled by Bloomberg.
Increased Demand
Some companies are positioning for a sustained increase in demand.
Caterpillar Inc., based in Peoria, Illinois and the world’s largest maker of construction equipment, posted its first earnings increase in seven quarters on April 26, exceeding analysts’ estimates.
Eastman Chemical Co., the biggest U.S. maker of plastics for water bottles, topped analysts’ estimates with first-quarter earnings and its second-quarter forecast. Jim Rogers, chief executive officer of the Kingsport, Tennessee-based company, said April 23 that its output will rise after first-quarter sales jumped 39 percent to $1.56 billion.
Macy’s Inc., the second-largest U.S. department-store chain, boosted its annual profit and sales forecasts yesterday. Sales at stores open at least a year will rise as much as 3.5 percent, Chief Financial Officer Karen Hoguet said at an analyst meeting in New York. The Cincinnati-based retailer earlier predicted a gain of 2 percent at most.
“There are questions about the pace of the recovery and the sustainability of the housing recovery,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “Therefore, it is too early to move. The extended period is still in force.”

http://www.businessweek.com/news/2010-04-28/fed-pledges-to-keep-low-rates-for-extended-period-update3-.html