A big week for the US, with the Federal Reserve expected to keep interest rates and its quantitative easing program on hold, and the first estimate of March quarter economic growth expected to show a sharp slowing.
The Fed started a two-day meeting overnight and the meeting winds up tonight, our time, with a statement issued at 4.15 am Australian Eastern Time.
In it the Fed is expected to again highlight the slow, but improving recovery, and to maintain the $US600 million bond buying program until it is due to end in June, and to keep interest rates at the current zero to 0.25%.
But what will interest the markets, economists and analysts is the central bank’s first ever post-meeting press briefing by chairman Ben Bernanke, and the post meeting statement for a clearer picture to the end of the asset purchase program and the long held commitment to maintain rates at their current record lows for "an extended period".
That is the key phrase in the statement to be issued tomorrow morning and the market will be watching that and any qualifications Mr Bernanke may make in his post-meeting press conference which will be held every quarter.
The AMP’s chief economist, Dr Shane Oliver says that "with recent US data being somewhat mixed, core inflation remaining low, global uncertainties remaining high and fiscal austerity looming large in the US its hard to see the Fed signalling anything other than a continuation of easy monetary conditions".
Then around 10.30 Thursday night our time the US government will release the first (but incomplete) estimate of March quarter economic growth.
The Fed will have seen these figures at its two-day meeting (which will also consider updated internal forecasts of its own for the economy, jobs and inflation for the quarter and the rest of 2011 and into 2012).
There is now general agreement that the US economy slowed sharply in the first quarter from the fourth quarter.
Surveys by the likes of Reuters, Bloomberg and other firms show growth estimates are running at an annual 1.4% to 1.8%, down from the 3.1% annual rate in the 4th quarter.
Core inflation – the Fed’s favoured measure which excludes food and energy – is running at an annual 1.2%, with the headline rate hitting 2.1% in March, thanks mainly to the sharp rise in oil and energy prices, plus higher food costs.
Jobs are at last growing, production is solid and consumer demand remains on track for modest growth this year, all of which should point to the transitory nature of the first quarter GDP figures (so economists say) and a rebound in the current and later quarters of the year.
The cause, the bad winter weather in January and early February, followed by floods in March, the rise in oil prices and the continuing weakness in the housing sector, plus signs of a rise in inventories, which could be telling us (if it happens) that demand is starting to slow.
But from figures so far released in the quarter, consumption, business spending and housing and construction have all weakened from the 4th quarter, while there seems to have been a build up in stocks and the trade deficit has risen.
Last week’s warning on America’s credit rating from Standard & Poor’s has changed the shape of the debate about American economic policy.
It is already being mentioned in connection to every major piece of data, especially anything to do with growth, employment and spending.
Higher growth will gradually reduce government spending and the deficit (but not debt, yet), increasing tax revenues.
Slower growth, as expected for the March quarter, will raise more questions about the ability of the Obama Administration and its Republican opponents, to control the deficit and spending.
But if the Fed stops buying bonds and starts reducing the size of its balance sheet by not rolling over the maturing bonds in its portfolio, that will be seen as a tightening in monetary policy and a fall in fiscal stimulus at a time when the economy still needs it.
The Fed likely won’t reduce its balance sheet but probably signal its intention later this year, when it is more confident about the strength of the economy.
And many mainstream economists have started pushing back their interest rate rise forecasts until the last quarter of 2011.
They will be pushed into 2012 if the economy continues at anything close to its current pace.
