Lesson learnt, Fed plans to stick with stimulus policies

Each time in recent years that the US Federal Reserve has paused in its efforts to stimulate the economy, it has come to regret the decision as premature. Its leading officials say the recovery has been slower as a consequence of those pauses. It is a mistake they do not want to repeat.

Each time in recent years that the US Federal Reserve has paused in its efforts to stimulate the economy, it has come to regret the decision as premature. Its leading officials say the recovery has been slower as a consequence of those pauses. It is a mistake they do not want to repeat.

When the Fed's policymaking committee meets on Tuesday and Wednesday, its members are likely to spend a lot of time talking about the potential costs of the stimulus campaign. Then the Fed's chairman, Ben Bernanke, will probably seek to reassure investors that the Fed plans to press on.

The central bank is buying $US85 billion a month of Treasury and mortgage-backed securities because it wants unemployment to fall more quickly.

While recent data suggests growth is quickening, Mr Bernanke has said the situation remains unacceptable.

Mr Bernanke and the Fed vice-chairwoman, Janet Yellen, "have been abundantly clear in recent commentary that the improvement in the labour market to date falls far short of what they will need to see before reducing monetary policy accommodation," said Joseph LaVorgna, chief US economist at Deutsche Bank, in a client note.

Also, the federal government has just embarked on a new round of spending cuts, known as sequestration, and the extent of the resulting drag on the economy might not be evident for several months.

"The Fed will not take overt steps to scale back its asset purchases any time soon," said Lou Crandall, chief economist at Wrightson ICAP, a financial research firm. "The Fed is not going to take any chances until it is sure that we have avoided another spring/summer swoon."

The central bank has said that it plans to hold short-term interest rates near zero at least as long as the unemployment rate remains above 6.5 per cent. It was 7.7 per cent in February. The asset purchases are intended to hasten the arrival of that moment by further reducing long-term borrowing costs for businesses and consumers.

But Fed officials who disagree with the policy are increasingly vocal in their criticisms, which can dilute the impact of the Fed's efforts by causing investors to doubt how much longer rates will stay low. In response, Mr Bernanke and other supporters of the policies have tried in recent weeks to persuade markets that the purchases will continue because the benefits far outweigh the potential costs.

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