Fed sees risks from Europe

Reuters US Online Report Business News
Dec 13, 2011 14:55 EST

WASHINGTON (Reuters) - The Federal Reserve on Tuesday pointed to turmoil in Europe
as a big risk to the economy, leaving the door open to a further easing
of monetary policy even as it noted some improvement in the labor
market.
The central bank characterized the economy as expanding moderately
despite an apparent slowing in global growth, and said that while there
had been "some" improvement in the job market, unemployment remained
elevated and housing depressed.
"Strains in global financial
markets continue to pose significant downside risks to the economic
outlook," the Fed said, alluding in a post-meeting statement to
pressures stemming from the debt crisis in the euro zone.
Prices for U.S. stocks and government debt pared gains, while the dollar rose against the euro after the announcement.
The
Fed's statement issued after a one-day meeting was little changed from
the announcement it released after its last gathering in early November,
and it only touched lightly on apparent improvements in the economy's
performance.
"They are certainly ready to lean against the wind should the economy falter," said Cary Leahey, managing director at Decision Economics in New York.
EVANS DISSENTS AGAIN
The
Fed offered no new guidance on its evolving communications policy, and
repeated that it expects inflation to settle at levels at or below those
consistent with its price stability mandate.
For a second time
running, Chicago Fed President Charles Evans dissented against holding
policy steady, saying he favored additional easing now.
The U.S.
central bank has held overnight interest rates near zero since December
2008 and has bought $2.3 trillion in government and mortgage-related
bonds in a further attempt to stimulate a robust recovery.
Fed
officials are divided among those who think high unemployment and
sluggish growth demand more action and those who view the central bank's
already-aggressive efforts as bordering dangerously on an invitation to
inflation.
Some influential policymakers, including Vice Chair Janet Yellen, have suggested they would be inclined to take additional steps if growth fails to pick up.
Recent
data about the U.S. economy do point to some improvement. The jobless
rate tumbled 0.4 percentage point to 8.6 percent in November, factory
activity has quickened and businesses are restocking depleted shelves.
Consumer
spending also appears reasonably solid, although a softer-than-expected
report on November retail sales on Tuesday offered a hint that it could
be flagging.
The U.S. economy expanded at a 2.0 percent annual
rate in the third quarter, a welcome acceleration from a sub-1 percent
pace over the first half of the year. Forecasters hope growth will top a
3 percent rate in the current quarter.
However, analysts say the recovery's current strength is partly a snapback from the weakness that followed Japan's natural disasters and high oil prices early in the year.
They caution that a return to more-sluggish growth is likely, particularly with a recession brewing in Europe.
Many
observers believe the Fed will step in to take steps to stimulate
growth in 2012, first through communications measures that drive home
their expectation that interest rates will not rise for along time, and
then through more bond buying.
Yellen has said the Fed could
reinforce its ultra-accommodative monetary stance by publishing
policymakers' forecasts for the path of interest rates. Officials are
also debating whether to adopt an explicit target for inflation.
The
first step would reassure skittish markets that the Fed is not about to
tighten policy any time soon. The latter would aim to dispel any doubts
about the central bank's commitment to keeping inflation low.
Top officials have also remained open to adding bonds to the Fed's already bloated portfolio.
Some
have said the central bank should resume purchases of mortgage-backed
securities to help revive the depressed housing market; others would
prefer to stick with purchases of U.S. government debt.
(Additional reporting by David Lawder; Editing by Andrea Ricci and Tim Ahmann)




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