The US Federal Reserve left its current rate settings steady and didn’t reveal any new measures to boost lending and liquidity in the economy after its two day meeting in Washington.
At the same time the New Zealand Reserve bank has cut its main rate by 0.50% to a record low 2.5%, and indicated the low rates will remain in place into 2010.
The moves by the Fed and its subsequent comments, and the rate cut by the NZ central bank, tells us that there;’s little chance of a return to positive growth in either economies for some time.
Nor is there in germany, which overnight forecast that its economy would contract by 6% this year, before a tepid rebound in 2010.
The Fed indicated that while the intensity of the slump was easing, no quick change in the recession would happen.
Therefore US rates will remain in the range 0% to 0.25% and the existing series of measures called Quantitative Easing will be maintained.
And any nascent optimism about the outlook was more influenced by the release early of the initial estimate of first-quarter gross domestic product.
Analysts’ median forecast is for the GDP to have fallen at an annual rate of 4.7% to 4.9% after tumbling 6.3% in the fourth quarter of 2008.
That was too optimistic: the US economy contracted by a disappointing 6.1% annual in the first quarter. The forecasters simply got it wrong.
Markets jumped on news in the growth figures that consumer spending rose by just over 2% in the quarter.
The Fed said in its post meeting statement:
"Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower.
"Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit.
"Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing.
"Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time.
"Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.
"In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term."
The GDP estimate was the first; the second and third estimates will have further information, especially on the volatile contributions from inventories and trade: these are estimates in the first forecast.
A slight recovery in consumer spending after a collapse in the second half of 2008 is expected in the GDP report.
Fed officials and analysts will also look for any signs the collapsed housing sector is showing any signs of stabilising: it is, but not enough to be convincing.
That will be enough to signal no change for the Fed?
Well those scattered ‘green shoots’ or the ‘breaks in the clouds’ to quote recent remarks from Fed members and other senior economic policymakers, seem to be enough to keep markets happy for the moment.
The GDP figures showed a rise in consumer spending and a fall in stocks, which the markets loved and they charged higher, up more than 2%.
Commodities rose sharply: gold, copper and oil. The Australian dollar rose 2 US cents to above 73 US cents.
Corporate earnings in the US were better than expected, even when they were down.
Although concerns about the weakness of US banks will hit confidence from now on until well into next week at least.
Bloomberg reported overnight that at least six of the 19 banks stress tested need more capital. The two usual suspects are Citigroup and Bank of America. .
Overnight Tuesday we got a couple of more: US consumer has improved, and the rate of fall in US house prices as measured by the Case Schiller house Price Index, has stopped growing: prices are still falling.
But the rate of fall could be slowing. Other measures (less comprehensive) have picked up a similar trend, although there’s not a really convincing case as yet.
The Fed restated its commitment to keeping rates as long as it takes to get the US economy stabilised and then growing.
The Fed cut interest rates to near zero in December as part of an unprecedented campaign to combat the painful recession and paralyzing credit crunch.
Then in March it stunned markets with two aggressive moves to boost lending even with its rate-cutting ability spent, committing to buy $US300 billion in longer-term Treasury securities and expanding its purchases of debt and mortgage-backed securities issued by government-sponsored mortgage enterprises by $US850 billion.
In doing that it was venturing down a path the Bank of England has started on, along with the Swiss central bank and The Bank of Japan.
Of interest will be any sign the Fed is considering increasing its Treasury purchase program.
The initiative is intended to cut US borrowing costs, but with yields on the benchmark Treasury 10-year note hovering near 3% (where it was when the measures were revealed in March), some analysts see the need for a bigger bout of QE to get rates down again.
But other analysts say there’s no need. Lending i
