Unfortunately for the US Fed, its two day meeting which wrapped up this morning won’t have much influence on the outlook for the IS economy: Friday night (Australian time), October jobs report will be a big sentiment shifter.
As will events in Europe and tonight’s meeting of the European Central Bank.
That’s not to say that the Fed’s post meeting statement, new economic forecasts for the US and the post meeting news conference of chairman, Ben Bernanke, won’t have some influence, they will.
Wall Street bounced after two days of falls closing up more than 1% as the Fed’s post meeting statement and comments from chairman Ben Bernanke were seen as more upbeat than earlier in the year.
That was after 2% gains in Europe where investors moved into a positive outlook about Greece, with a mini summit overnight between the leaders of Greece, France and Germany.
In comments after the meeting, the Fed chairman indicated he was open to more easing if the economy needed it.
The Fed said that growth had strengthened somewhat in the third quarter but that “significant downside risks” remain.
"Economic growth strengthened somewhat in the third quarter" … "recent indicators point to continued weakness in labour market conditions" and "there are significant downside risks to the economic outlook, including strains in global financial markets".
Charles Evans, the president of the Chicago Fed, was the lone dissenter. He favored more easing.
All signs point to continued weakness in labor markets, the Fed said and it continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually.”
The Fed was sanguine about the price outlook, saying that “inflation appears to have moderated since earlier this year” and will settle over coming quarters into the central bank’s informal target range near 2%.
Despite the slightly more optimistic tone, the Fed slashed its outlook for US growth sharply for this year, 2012 and 2013, and also significantly increased its unemployment rate forecast, compared to an earlier forecast in June.
The Fed’s now see 2011 GDP between 1.6% and 1.7%, down from June’s 2.7% to 2.9% forecast rate.
GDP for 2012 is now forecast to improve to the range, 2.5% to 2.9%, against the June estimate of 3.3% and 3.7%.
And for 2013, the Fed now sees growth in the range of 3.0% and 3.9%, down from 3.5% to 4.2%.
On unemployment the Fed sees the jobless rate for this year being around 9% to 9.1% (currently 9.1%), and 8.5% to 8.7% next year, down from the 7.8% to 8.2% seen in June.
Fed officials believe the economy will have reached full employment when the jobless rate drops to between 5.2% and 6%.
In the latest forecast, the unemployment rate would still be at 6.8% to 7.7% at the end of 2014.
On personal consumption expenditure inflation (the measure most favoured by the Fed), it now sees 2.7% to 2.9% inflation this year, 1.4% to 2% inflation next year, 1.5% to 2% inflation in 2013 and 1.5% to 2% inflation in 2014.
Fears about events in Europe saw markets across Asia down for a third day with the Australian market off 1% and 3.5% this week, but Hong Kong and China saw 1%-plus gains.
With events in Europe delicate ahead of the G20 leaders meeting tonight and tomorrow night in France, no one wants to disturb the chances of sanity returning to the eurozone and keeping the Greek bailout proposal alive.
So while the concentration will be on the US economy, the problems in Europe and a looming recession there will be the unspoken events for the Fed and analysts looking at the post meeting statements.
US economists say the 2.5% (annual) growth rate in the first estimate of third quarter growth has postponed talk of more stimulus from the Fed.
And a solid employment report tomorrow night will push any the chances of any new Fed move out into late 2012, if the economy remains sluggish.
The Fed updated economic forecasts, the first time since June.
In August, the Fed surprised analysts by saying that it anticipated that short-term rates would stay at zero until mid-2013.
This was the first time that the central bank has given such a commitment.
And then in September, the Fed revived a 1960s-era program called “Operation Twist” in which it will sell $US400 billion worth of short-maturity bonds it holds and reinvest in bonds maturing between 6 and 30 years by the end of June 2012.
The Fed has already purchased $US2.3 trillion in assets over the past three years to boost growth.
The Fed now has to wait until later this month, around Thanksgiving, for the report on the so-called Supercommittee that is looking at big cuts in US spending.
This process was agreed to in the dramatic early August agreement that averted a US government shutdown and possible default.
What it couldn’t avoid is a credit rating downgrade which was delivered by Standard & Poor’s.
Some US analysts reckon the chances of agreement on spending cuts by the end of this month is pretty rare and are factoring in more ratings downgrades and another political impasse.
The Fed has to keep this possibility in mind.
