September 30, 2023

Fed, More Optimistic About Economy, Maintains Bond-Buying

WASHINGTON — Federal Reserve policy makers, more confident about the economic recovery, on Wednesday maintained their current pace of monetary stimulus.

Fed officials also predicted in their latest economic forecast, released Wednesday, that the unemployment rate will decline more quickly than they had previously expected, sitting between 6.5 percent and 6.8 percent at the end of 2014. They had predicted in March that the rate would sit between 6.7 percent and 7 percent.

Officials predicted that the annual pace of inflation would rebound next year, rising closer to the 2 percent rate that the Fed considers healthy.

The improved outlook helps to explain why Fed officials have increasingly suggested that they may seek to reduce the pace of asset purchases in the coming months. The Fed has said that it will stop buying bonds well before it begins to raise interest rates. While the vast majority of the 19 Fed officials who participate in policy continue to expect a first rate increase in 2015, 13 said they expected the Fed to raise its benchmark short-term rate at least to 1 percent by the end of 2015, implying that increases would begin relatively early in the year. In March, only 10 officials forecast that rates would hit 1 percent by the end of 2015.

The Fed’s forecasts have consistently overestimated the strength of the economic recovery since the end of the recession. The central bank has suspended its stimulus efforts twice in recent years, only to find that it needed to do more. Officials have said that they are eager to avoid repeating those mistakes. But there is growing optimism inside the central bank that the Fed is finally doing enough.

The Fed is trying to encourage job creation through a very loose monetary policy, holding short-term interest rates near zero and by purchasing $85 billion a month in mortgage-backed securities and Treasury securities.

Economic conditions have improved modestly since the Fed began this latest round of asset purchases last September. The economy has added about 197,000 jobs a month, on average, and the unemployment rate has fallen slightly to 7.6 percent in May from 7.8 percent in September. The impact of federal spending cuts so far has been smaller than many forecasters, including the Fed, had expected.

But the economic damage of the recession remains largely unrepaired. Job growth is basically just keeping pace with population growth. The share of American adults with jobs has not increased in three years. At the same time, the Fed’s preferred measure of inflation has sagged to an annual pace 1.05 percent, the lowest level in more than 50 years, as the economy continues to operate below capacity.

Despite high unemployment and low inflation, the Fed has shown no sign of interest in expanding the pace of its stimulus campaign. Officials say that they are doing as much as they can. The debate instead has focused on how soon the Fed can afford to start buying fewer bonds.

Such a deceleration is not likely before September, at the earliest, but officials have sought to prepare investors for the change. In particular, the Fed wants to underscore that a smaller monthly volume of bond purchases still means that the Fed’s portfolio would be growing larger with each passing month. Indeed, the Fed argues that such a change would not amount to a tightening of monetary policy because the size of the portfolio is the source of the stimulus.

The Fed’s chairman, Ben S. Bernanke, also has been at pains to remind investors that a change in the pace of bond purchases does not indicate a change in the duration of the Fed’s plans to keep short-term rates near zero, which it has said it intends to do at least until the unemployment rate falls below 6.5 percent.

Investors, however, have responded skeptically. After all, the Fed needs to slow down first before it begins to retreat. Interest rates on 10-year Treasuries, a benchmark for the Fed’s efforts to reduce borrowing costs, rose to 2.20 percent on Tuesday from a low of 1.66 percent at the start of May.

“Fed officials have been trying to convince everyone that QE is a flexible instrument and that the onset of tapering does not convey information about the date of the first fed funds rate hike,” Vincent Reinhart, chief United States economist at Morgan Stanley, wrote Wednesday. “We believe such a conclusion is false.”

Moreover, some economists regard the volume of monthly purchases as more important than the total amount of the Fed’s holdings, meaning that a reduction in monthly purchases would indeed tend to tighten financial conditions.

The Fed also finds itself warring against psychology.

The Fed has established $85 billion as a baseline in the minds of investors. That might not matter if the benefits of the program were purely mechanical. But buying bonds is also a way for the Fed to signal its determination to keep interest rates low for years to come.

The program, in other words, is an effort to instill confidence in investors. And any reduction in the pace of purchases tends to undermine that message.

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Bank of England Holds Interest Rates Steady

FRANKFURT — The European Central Bank left its benchmark interest rate unchanged Thursday, but was expected to signal that markets should expect a move next month — despite the euro area’s uneven economic recovery.

The Bank of England, meanwhile, kept its main interest rate at a record low amid concerns that the country’s economy is still too weak to cope with higher borrowing costs. It did not issue a statement.

Jean-Claude Trichet, the E.C.B. president, was to hold his regular news conference at 2:30 p.m. Frankfurt time.

Analysts and economists predicted he would say that the bank is “strongly vigilant” toward inflation. That language would indicate a rate increase in July is probable, though the bank always leaves its options open.

On Thursday, the E.C.B. left its rate at 1.25 percent, after raising it in April from 1 percent, the first increase in two years. The benchmark rate in Britain was left at 0.5 percent and the central bank also kept the size of its asset purchase plan unchanged at £200 billion, or about $328 billion.

With Germany, the euro-zone’s largest economy, growing so quickly that some economists fear overheating, the E.C.B. has been trying to nudge interest rates back to levels that would be normal in an upturn.

But the bank faces a policymaking dilemma because the Greek debt crisis still threatens growth in the 17-member euro area as a whole. Economies in Spain, Ireland and other so-called peripheral countries remain sluggish. Higher rates could make it that much harder for those countries to recover.

The economy also remains fragile in Britain. Consumer confidence took a hit in April as more people claimed unemployment benefits and real wage increases lag inflation, weighing on living standards. Spending cuts and tax increases that are part of the government’s austerity program made households even more reluctant to spend.

“The story of weak growth is still going to continue for a while,” James Knightley, a senior economist at ING Financial Markets in London, said.

Some economists had predicted rates would rise in May this year, but as the economic outlook deteriorated have pushed that back to next February. Mr. Knightley expects an increase as early as November this year.

The British economy stagnated in the six months until the end of March. The Bank of England governor Mervyn King has warned that inflation could accelerate to about 5 percent in the short term before falling again. Higher consumer prices, partly a result of higher commodity prices, have started to dampen household spending as companies remain reluctant to hire and banks continue to hold back on lending.

Paul Fisher, a Bank of England official, argued last week that raising interest rates should be delayed until the economy was stronger. The International Monetary Fund on Monday backed Prime Minister David Cameron’s plan to cut the budget deficit, which had been criticized by the opposition Labor Party as too strict and harming the economic recovery.

Julia Werdigier reported from London.

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Inside Asia: For Bankers, a Week of Difficult Calls

SINGAPORE — Predicting the next interest rate moves out of South Korea or China was hard enough before the global economy wobbled. Now it’s looking like a coin toss.

Five central banks in the Asia-Pacific region hold policy-setting meetings this week — Australia, New Zealand, Indonesia, South Korea and Sri Lanka. All except South Korea are expected to remain on hold, and even the economists forecasting a Bank of Korea rate increase acknowledge that it has become a close call.

Even if they all stick to the script, officials’ comments merit careful parsing for any indication about how they interpret the recent run of weak economic data. Is it merely a Japan-induced, short-lived lull or something more worrisome?

Policy makers must balance powerful, conflicting forces: The softening global outlook cools exports and therefore growth prospects, but home-grown demand remains strong in most countries, keeping up the inflationary pressure.

Richard Prior-Wandesforde, a Credit Suisse economist in Singapore, said that as long as inflation remained uncomfortably high and interest rates below normal, most Asian central banks would keep tightening monetary policy to reduce the flow of cheap credit. China, South Korea, India and Thailand may be even more aggressive than investors expect, he said.

“We only expect the region to suffer a few quarters of subtrend growth, not a return to recession,” Mr. Prior-Wandesforde said. “In fact, economic activity is unlikely to be soft enough to put an end to Asia’s rate-hiking cycle for a few months yet.”

But for central bankers inclined to put more emphasis on growth than inflation, even a modest slowdown may be reason enough to delay tightening. U.S. employment softened last month, and businesses around the world trimmed factory orders, so export-focused economies have reason for concern.

South Korea is arguably the toughest call. The Bank of Korea has developed a reputation for unpredictability, and it surprised markets yet again at its May meeting by holding rates steady. But it was a split decision, with two of the six board members expressing concerns about rising inflation expectations.

Many economists expect a quarter-point increase at the bank’s meeting Friday as steep food and energy costs filter into the prices of other goods and services. Core inflation, which excludes food and energy prices, has crept higher.

Doubts, however, are growing. Nomura dropped its call for a June rate increase, arguing that the Bank of Korea seemed more concerned about the risk of faltering growth than about inflation.

“The inherently pro-growth Korean government may have influenced the B.O.K.’s monetary policy,” said Young Sun Kwon, Nomura’s senior Korea economist in Seoul.

Jiwon Lim, a JPMorgan Chase economist also based in Seoul, is sticking with a forecast for a rate increase this week but said it “now becomes a close call” after the recent run of weak economic data.

Australia’s rate decision is also looking like less of a sure thing than it was a week ago, when the government released data showing that flooding had pushed first-quarter economic output down 1.2 percent, slightly worse than economists had expected.

Although economists are still banking on no change to monetary policy, some think the Reserve Bank of Australia might want to burnish its inflation-fighting credentials by springing a surprise interest rate increase Tuesday.

Even if it holds its fire at this meeting, the Reserve Bank of Australia will probably lay the groundwork for higher rates soon. Inflation accelerated in the first quarter despite the negative reading on growth, and with unemployment at a tight 4.9 percent, the economy does not have much slack.

It is a very different story in Indonesia, where economists expect no change in monetary policy. Inflation readings have looked benign, helped by Jakarta’s subsidies for fuel, keeping consumer prices down.

The global cooldown has taken some of the pressure off commodity prices, particularly for oil. That will eventually filter into Asian economies and reduce concerns about overheating. Indeed, many economists think inflation will peak soon.

But that does not mean central bankers can afford to wait it out. China in particular has a few tricky months to navigate before it can be sure that inflation will not go higher.

Drought and power shortages mean China’s food and energy costs may keep rising even after global prices begin to fall. Although Beijing raised power prices last week, a move that could make it more cost-effective for energy companies to increase production, demand is still running far ahead of supply.

Jian Chang, a China economist for Barclays in Hong Kong, said Beijing probably would not deviate from its planned tightening course and could raise rates before it releases May consumer price data next week.

Still, for central bankers already leaning toward keeping monetary policy looser, the combination of inflation peaking and growth slowing may be too much temptation.

Frederic Neumann, co-head of Asian economic research at HSBC in Hong Kong, said the bad economic news did not justify a pause in the tightening cycle, pointing out that interest rates in the region remain “structurally far too low.”

“But, central bankers may see something nastier on the horizon and opt to hold. This week will bring important clues as to what they are thinking,” Mr. Neumann said.

Emily Kaiser is a Reuters correspondent.

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China G.D.P. Rises 9.7 Percent

China’s gross domestic product increased by 9.7 percent in the first quarter from a year earlier, down from 9.8 percent in the final three months of 2010 but ahead of an expected 9.5 percent pace.

Consumer price inflation sped to 5.4 percent in the year to March, the fastest since July 2008 and topping market forecasts for a 5.2 percent increase.

Taken together, the data published by the National Bureau of Statistics on Friday showed that the world’s second-largest economy was still sizzling, little hindered by the central bank’s half-year tightening campaign that many investors had feared would undermine growth.

“The figures show that inflation pressure will not taper off in the short term and we expect the consumer inflation to remain high in the second quarter,” said Sun Miaoling, economist with CICC, the largest Chinese investment bank.

“The government will keep battling inflation as its priority in coming months, which could prompt the central bank to further tighten its monetary policies,” she added.

The People’s Bank of China has increased benchmark interest rates four times since last October and has required the country’s big banks to lock up a record high of 20.0 percent of their deposits as reserves.


Inflation had long been expected to run higher in March because of a lower base of comparison. The base effect also suggests that inflation is likely to level off in the coming months before jumping again in June and July, though officials are confident that it will wane in the second half of the year.

Accepting this relatively sanguine view, many economists had thought that the central bank was near the end of its tightening cycle. The median forecast of Reuters poll last week was for just one more interest rate increase over the rest of this year.

But with growth still cruising near double digits, the scope for the government to continue tightening may be bigger than previously anticipated.

Signaling a potentially hawkish stance in the coming months, Premier Wen Jiabao said this week that the government would use all tools at its disposal to wrestle inflation under control.

“We will try every means to stabilize prices, the top priority of our economic controls this year and also our most pressing task,” Wen said at a cabinet meeting.

Agricultural prices have been the main driver of Chinese inflation and that remained the case, with food costs up 11.7 percent in the year to March. But there were also signs of a broadening of pressures, with non-food inflation up 2.7 percent year on year, the fastest in more than a decade.

“The risk is that high oil prices will keep headline inflation stronger for longer,” said Brian Jackson, economist with Royal Bank of Canada in Hong Kong.

“This also suggests that policy rates still need to move higher in the months ahead, with Beijing also likely to favor further currency appreciation to help get inflation lower,” he said.

While keeping a tight grip on the yuan, China has steered its exchange rate to a succession of record highs against the dollar in recent days, using a stronger currency to blunt the impact of high import costs.


The first-quarter data also offered a glimpse of the Chinese rebalancing that is needed to put the global economy on more stable footing.

From the World Bank to Chinese leaders, the consensus has long been that China needs to promote more domestic consumption and cut its reliance on both exports and energy-intensive investment.

That finally appears to be happening. Consumption contributed 5.9 percentage points to China’s first-quarter growth rate, while investment added 4.3 percentage points, the statistics agency said. Net exports actually subtracted 0.5 percentage points, weighed down by a $1 billion trade deficit, China’s first quarterly deficit in seven years.

It remains to be seen how much of the apparent rebalancing was a product of soaring global oil costs, which both boosted China’s import bill and inflated consumption in price terms.

Speaking at a business forum in southern China on Friday, President Hu Jintao said that the country’s economic model was still out of kilter.

“Over the next five years China will make a great effort to boost domestic demand, especially consumer demand,” he said.

Global markets registered little impact from the Chinese data, in large part because the numbers appeared to have been comprehensively leaked in the days prior to the official release.

The main Chinese stock index in Shanghai was down 0.5 percent after morning trading and share prices throughout Asia were also slightly softer, with investors bracing for the next round of tightening by Beijing.

(Additional reporting by Aileen Wang, Huang Yan and Kevin Yao, and Ben Blanchard and Zhou Xin in Boao; Writing by Simon Rabinovitch; Editing by Ken Wills)

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European Bank Raises Rate for 1st Time Since 2008

Jean-Claude Trichet, the E.C.B. president, argued that the bank needed to attack inflation even though many economists believe that raising borrowing costs could damage weaker economies like Portugal, which only a day earlier became the third country in the euro area to request an international bailout.

With what sometimes sounded like contrarian pride, Mr. Trichet said that the rate increase was perfectly in tune with economic growth.

“There is no contradiction, but full complementarity in doing what is our prime mandate, which is to deliver price stability,” he said at a news conference after a meeting of the governing council of the E.C.B. “We do what we have to do even when it is difficult, even when it is not necessarily pleasing everyone.”

Asked by an Irish reporter what he would say to families in Ireland who will now have to make higher payments on their adjustable-rate mortgages, Mr. Trichet said low inflation “benefits all, including, of course, those who have the most difficulty at the present.”

The increase in the benchmark policy rate to 1.25 percent from 1 percent puts the E.C.B. at odds with the Federal Reserve, which continues to stimulate the U.S. economy, as well as the Bank of England, which on Thursday left its benchmark interest rate at 0.5 percent, despite an increase in inflation.

The E.C.B.’s decision, which Mr. Trichet said was unanimous on the 23-member governing council, drew muted praise from places like Germany, where the rate increase could help prevent the economy from overheating. But the reaction from other quarters was sometimes scathing.

The rate increase could have dire consequences for Greece, Ireland and Portugal when they are already having severe problems borrowing money at reasonable rates, some economists said. Portugal’s caretaker government gave in to market pressures on Wednesday and joined Greece and Ireland in seeking an emergency bailout.

“Tighter monetary policy will only add to the burden of reeling peripheral countries and increase the risk of a much worse debt crisis,” Marie Diron, a former E.C.B. economist who now advises the consulting firm Ernst Young, said in a note Thursday. “We hope that this rate hike is not the start of a series of rate increases that would seriously endanger the fragile recovery.”

Michael T. Darda, chief economist at MKM Partners, a research firm in Stamford, Connecticut, said the E.C.B. was repeating the same mistake that the Fed made in the 1970s and 1980s, when it responded to higher oil prices by raising rates, and, instead, created recessions.

“Those recessions were not oil-induced but Fed-induced,” said Mr. Darda, citing an academic paper by Ben S. Bernanke, now the Fed chairman, that criticized Fed policy at the time.

Though interest rates are still low by historical standards, they are high in relation to Europe’s stuttering growth rate, Mr. Darda said.

“The ultimate effect is that they are going to restrain inflation in Germany and France but will cause deflation in the periphery, which will cause austerity programs to fail,” Mr. Darda said by telephone. “This could very well spread into Spain and Italy.”

Mr. Trichet said that a rate increase would hold down long-term borrowing costs, by giving lenders confidence that inflation would not erode their profits.

The Bank of England faces similar inflation concerns, but left its main policy rate alone after recent economic data painted a mixed picture of the strength of Britain’s recovery. It also kept its bond-purchase plan at £200 billion, or $325 billion.

Not all economists were so critical of the E.C.B. move.

“Fear that this step by the E.C.B. will lead to a worsening of the crisis in the peripheral countries is overdone,” Michael Heise, chief economist at the German insurer Allianz, said in a note to clients. Even if the E.C.B. raises the rate to 2 percent by the end of the year, real interest rates would still be lower than inflation, he said.

In light of strong German growth, the “rate decision was without doubt logical,” Karl-Heinz Boos, executive director of the Association of German Public Sector Banks, said in a statement, though he added that the E.C.B. should be cautious about raising rates further.

And Mr. Trichet suggested that another rate increase soon was not a foregone conclusion. “We did not decide today that it was the first of a series of interest rate increases,” he said. Analysts interpreted his remarks to mean that the E.C.B. might wait several months before raising rates again.

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European Central Bank Makes First Rate Hike Since 2008

FRANKFURT — Worried about rising prices, the European Central Bank raised its benchmark interest rate for the first time since 2008 on Thursday, risking damage to weaker economies like Portugal, which only a day ago became the third country to request an international bailout.

A short time earlier, Britain’s central bank left its benchmark interest rate at 0.5 percent despite similar inflation concerns, after recent economic data painted a mixed picture of the strength of Britain’s recovery. The central bank also kept its bond-purchase plan at £200 billion, or $325 billion.

But the E.C.B. is taking a more hard-line approach in raising its rate to 1.25 percent from the historic low of 1 percent, where it has been since the depths of the global financial crisis. The bank president Jean-Claude Trichet and other members of the governing council had warned repeatedly over the past month that they were worried that higher oil prices would fuel a general increase in prices.

Many economists and political leaders said that a rate increase for the euro zone was premature and unnecessary, arguing inflation is not a problem when factories are still not operating at full capacity, and that higher inflation is solely the result of volatile commodity prices.

“We cannot see what good purpose raising interest rates now will accomplish,” Carl B. Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y., wrote in a note this week.

The E.C.B. move will hurt Greece, Ireland and Portugal when they are already having severe problems borrowing money at reasonable rates, critics said. Portugal’s caretaker government gave in to market pressures on Wednesday and joined Greece and Ireland in seeking an emergency bailout.

The rate increase will also raise monthly mortgage payments in countries like Spain and Ireland where many people have variable-rate loans.

However, a rate increase will be welcomed by individuals and companies who keep their money in savings accounts or low-risk investments, and have been earning interest below the rate of inflation.

Lorenzo Bini Smaghi, a member of the E.C.B. governing council, has argued that a rate increase would actually hold down long-term borrowing costs, by giving lenders confidence that inflation will not erode their profits.

Analysts expect the rate increase Thursday to be the first of two or three such hikes before the end of the year. Mr. Trichet will hold a press conference at 2:30 p.m. Frankfurt time, where he is likely to be asked how fast the E.C.B. will push rates back to more normal levels.

Economists at Nomura forecast that the next increase will come in July, and that the benchmark rate will reach 2.75 percent by the end of 2012, still a low rate by historical standards. But the E.C.B. could also hold off on further increases if there are signs that higher energy prices are becoming a drag on European growth.

“Any signs that the recovery is significantly losing momentum will likely make the E.C.B. pause its rate-hiking cycle,” Nomura economists said in a note Tuesday.

The E.C.B. may also say Thursday how it will deal with weaker banks in countries like Ireland, Greece and Germany that have become overly dependent on cheap central bank loans to finance their activities. Mr. Trichet and other governing council members have said they want to remove the financial system from life support, and avoid the risk of asset bubbles or other problems caused by too much cheap money.

In a break from the historic pattern, the E.C.B. is moving to slow the economy and head off inflation ahead of the Federal Reserve. More than the American central bank, the E.C.B. is required by charter to make fighting inflation its top priority.

E.C.B. resolve was probably strengthened by recent data. Inflation in the euro area rose at an annual rate of 2.6 in March, up from 2.2 in February and above the E.C.B. target of just under 2 percent.

The E.C.B. last raised its benchmark rate to 4.25 percent from 4 percent in July 2008. The following October, as the financial crisis took on alarming proportions, the E.C.B. reversed course and began a series of cuts that brought the benchmark rate to 1 percent in May 2009.

Rates in Britain also fell to a record low, but the Bank of England rate is likely to wait for more data at the end of this month before making any decision to lift interest rates, economists said.

Britain’s central bank fears that raising interest rates too soon could damage an already weak economic recovery. Some economists said consumers are still getting used to government spending cuts, which are coming into force this month, as well as higher taxes and oil prices. That made it harder for the Bank of England’s policymakers to judge whether the economy is strong enough to withstand an increase in interest rates.

Alan Clarke, an economist at BNP Paribas in London, said a rate increase by the E.C.B. could put additional pressure on the Bank of England to raise its own rate because it could weaken the pound. “A weaker pound in our recent experience has led to higher inflation,” he said.

The Bank of England had been trying to balance an inflation rate that is the highest since 2008 with economic growth that remains slow. In a meeting last month, central bank officials said that there was “merit” in waiting to see how the government’s austerity program, which includes thousands of public sector job cuts, would affect the economy.

Recent economic data renewed some concern that Britain is still struggling after shrinking 0.5 percent during the last three months of 2010. Britain’s manufacturing sector stopped to grow in February and overall industrial production fell unexpectedly. Yet, the services sector grew at its fastest pace in 13 months in March.

The average price of houses was little changed in March as potential buyers delayed decisions because of concerns about economic growth and as higher consumer prices hurt disposable incomes.

Julia Werdigier contributed reporting from London.

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