BRUSSELS (Reuters) – The US Federal Reserve would give the clearest signal next week that its easy money stance is ending if, as some expect, it drops its two-year long pledge to keep interest rates close to zero for a “considerable time”.
The Fed, which meets on Tuesday and Wednesday, first inserted that wording in its post-meeting statements in December 2012, promising then to maintain its highly accommodative monetary stance for a considerable time after its asset purchase programme ends and the economic recovery strengthens.
Both have occurred.
The US unemployment rate slipped below 6.5 per cent, a Fedmark of healthier recovery, in April and is now at a six-year low of 5.8 per cent even as more people enter the labour force. Its asset buying ended in October, when all but one of its voting members opted to keep the “considerable time” language.
The market has understood the term to mean at least six months, with current expectations for a first rate hike in mid-2015.
Since October, the more hawkish Dallas Fed chief Richard Fisher has said the Fed should drop the pledge, while more moderate Cleveland counterpart Loretta Mester told Reuters the reference was “really stale.” Some economists believe markets will take a change of wording in their stride, but others hark back to “taper tantrums” after the Fed first mentioned the idea of gradually reducing monetary expansion in May 2013.
“It has to be done at some point, but it’s like taking off a sticking plaster. It’s going to hurt,” said Rob Carnell, chief international economist at ING, who questions central banks’ propensity to use set terms rather than just rely on data.
Carnell believes US headline inflation may well fall below one per cent in the March-May period, when seasonal adjustments would give a greater weighting for a weak oil price than at present.
“It’s then a hard sales act to start hiking in May or June,” he said.
The week, for many the final working days before Christmas and New Year holidays, will conclude with a European Union Summit focused firmly on the faltering economy.
In an ideal world for some economists, France and Italy, thenumber two and three euro zone economies, would pledge moregrowth-driving reforms and budget restraint, providing cover for the European Central Bank to unleash new weapons to fight deflation. Pressure on the ECB to start printing money and buying sovereign bonds rose further last week as its offering of low-cost loans to banks drew only tepid interest.
Banks have taken barely half the 400 billion euros ($497.4 billion) of loans on offer this year, implying they have little confidence in lending to the euro zone’s backbone of small companies. ECB policymakers have dropped hints that it could move in the direction of money printing as soon as January, but a small group of countries led by Germany are opposed, fearing it would lead to reckless borrowing by debt-laden states. “(ECB President Mario) Draghi has seven weeks to get everyone in line. I don’t think he’ll pull it off before Christmas,” said Philippe Gijsels.