Fed waits for job market to perk up

Sun Jan 27, 2013 2:07pm EST
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By Alan Wheatley, Global Economics Correspondent

LONDON (Reuters) - The Federal Reserve's ultra-loose monetary policy is a root cause of the "currency wars" that some see as a looming threat to the world economy, but don't expect the U.S. central bank to signal a shift back to normal any time soon.

The Fed, whose policy-setting Federal Open Market Committee concludes a two-day meeting on Wednesday, said just last month that it expects to keep short-term interest rates exceptionally low until the U.S. unemployment rate falls to 6.5 percent, inflation permitting.

That goal is still distant. Figures on Friday are likely to show that the jobless rate was unchanged in January at 7.8 percent, while the economy created 155,000 jobs, the same as in December, according to economists polled by Reuters.

So it would be a huge surprise if the Fed were to do anything other than reaffirm last month's decision to anchor short-term interest rates in a range of zero to 0.25 percent and to keep buying $85 billion of bonds each month to hold down long-term rates.

The only question mark is whether the FOMC vote will be unanimous now that Richmond Fed President Jeffrey Lacker, who opposes the current round of bond-buying, has rotated off the panel, said Harm Bandholz, an economist with UniCredit Bank in New York.

Most economists polled by Reuters expect the Fed to keep its open-ended bond-buying program in place well into next year, even though the economic news flow and market confidence are improving markedly.

True, Wednesday's preliminary report on fourth-quarter GDP is likely to show that growth slowed to an annualized rate of 1.2 percent from 3.1 percent in the July-September period.

And the current quarter will also be soft as the expiry of a 2 percent payroll tax cut is dampening consumer spending.   Continued...

A view shows the Federal Reserve building in Washington in this file photo taken August 22, 2012. REUTERS/Larry Downing