Wednesday, January 28, 2009

Fed eyes new crisis tools

WASHINGTON - FEDERAL Reserve policymakers open a two-day meeting on Tuesday in search of new tools to stimulate lending and revive an economy that has so far failed to respond to its zero-interest rate policy.

The two-day meeting of the Federal Open Market Committee is being held six weeks after the central bank slashed its base lending rate to a range of zero to 0.25 per cent and predicted 'exceptionally low' rates to persist 'for some time.' Sacha Tihanyi, analyst at Scotia Capital, said the market expects some additional help from the Fed.

'With rates going nowhere for some time, the market's focus will be on whether the Fed will be looking to buy government (or corporate) securities in the near future. This is a highly controversial step and some see this as somewhat of a high-risk policy but on the other hand, it is one of the few avenues the Fed has left open to it with regard to further easing monetary conditions.'

Despite the zero rate policy, Fed chairman Ben Bernanke and others have repeatedly said the central bank is not out of ammunition to fight the crisis.

Mr Bernanke said earlier this month the Fed still has 'powerful tools' at its disposal to counter a crisis that began with a US real estate meltdown and spread to the global financial sector, resulting in a credit squeeze and slump that has affected consumer spending, manufacturing and the broad economy.

'The only sure thing is that the Fed won't cut rates,' said Mr John Gencher at BMO Capital Markets.

'What it likely will do is reaffirm the commitment to keep rates exceptionally low for a while and will employ all available tools to increase credit for businesses and households.'

The Fed 'has already done a lot and will continue to do a lot' in addition to moving on interest rates, said Mr Nariman Behravesh, chief economist at IHS Global Insight.

The central bank has already offered exceptional aid to banks and other firms, and has been buying up mortgage-backed bonds and commercial paper to help unfreeze credit in those areas.

Analysts say this has helped somewhat but that credit markets remain under stress, with lenders and consumers skittish about taking on new risks.

'The big thing they could do is so-called quantitative easing, which would be directly going in and buying government bonds. The reason they would do that would be to lower mortgage rates,' Mr Behravesh said. 'I will look for some kind of signal on this.'

Mr Adolfo Laurenti, senior economist at Mesirow Financial, said the Fed has to walk a fine line in communicating its policy moves and its economic outlook.

Mr Laurenti said he does not expect the Fed to acknowledge the use of quantitative easing, a move used by Japan that focused on the quantity of money in the financial system.

'I think part of the problem is that if you look back at what Japan did in the 1990s it did not work very well,' Mr Laurenti said.

'The Fed wants to mark a difference between what Japan did and what they want to accomplish.'

Mr Laurenti said the Fed will make a major effort to shore up confidence, helping the nation weather what appears to be a deep recession that may ease in the second half of 2009.

He said the gross domestic product figures set to be released Friday will show a fourth-quarter economic picture 'that will look awful' with a decline at a pace of as much as six per cent. The outlook remains grim for the 2009 first and second quarters.

'I think they need to acknowledge the fact that the economy is weak and will continue to deteriorate until the second half and at the same time they need to manage expectations,' he said.

'How to prepare expectations without sounding alarmist is a very tough balance. They will be parsing every single word, to make the point without contributing to the depressed climate.' -- AFP
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