Fed likely to stay the course, even as economy appears mixed

At the start of the year, the Federal Reserve was a dour pessimist-- even though a range of economic indicators were starting to suggest that the nation’s recovery was finally gaining enough momentum to sustain itself.

As Fed officials meet Tuesday and Wednesday to discuss policy, they might again be in the position of leaning against the wind — but this time by showing optimism, even though the most recent data have suggested that the recovery might be losing steam.

The Fed said in January that it planned to hold interest rates near zero through at least late 2014 — 18 months longer than expected — and suggested that more actions to stimulate the economy were being considered. Officials predicted that by the end of 2012, the unemployment rate would be between 8.2 percent and 8.5 percent.

Since that meeting, though, economic data continued to come in strong. Housing showed signs of bottoming, and the stock market roared back as Europe seemed to stabilize. The unemployment rate today stands at 8.2 percent.

Fed Chairman Ben S. Bernanke acknowledged at a February congressional hearing that he was surprised by the pace of recovery in the job market.

When the Fed unveils the results of its policymaking meeting on Wednesday, the central bank is not expected to announce any new actions to help the economy or to give even a hint of additional stimulus. And with the unemployment rate already where the Fed predicted it could land by the end of the year, some analysts expect to hear a sunnier outlook on jobs.

“It seems the Committee would have to revise down 2012 unemployment forecast at least some, and could also tick down 2013 and 2014 unemployment,” said Michael Feroli, chief U.S. economist at JPMorgan Chase, in a research note.

This would all seem to jibe — the downer turning positive in the face of stronger data — if the most recent economic indicators had not provided reason for worry.

The April unemployment report came in disappointing, with the economy creating half the number of jobs that analysts expected. After a long decline, more people started filing for unemployment insurance. And Europe showed new signs of stress.

The Fed is likely to be cautious this week, noting the improvement in the jobs market but the persistent challenges, and the risk that the economy could turn south again. Many analysts expect little to change in the central bank’s policy statement from what it said at its last meeting in March.

Last month, the central bank said it “expects moderate economic growth over coming quarters and consequently anticipates that the unemployment rate will decline gradually.”

Many economists would probably say that’s an accurate description of where the economy stands today. Still, there remains a risk that what happened in 2010 and 2011 — signs of recovery early in the year upended by economic weakness in the summer and fall — will recur.

The Fed seems content for the moment to see how things unfold — neither trying to stimulate the economy by announcing new action, nor doing anything that would stall the recovery by signaling that it will scale back measures to keep interest rates near zero.

The division on the Fed about what to do next — the Fed has a legal mandate of keeping unemployment low and keeping prices from rising too fast — reflects the differing expectations about what the path of the economic recovery.

Some on the Fed are pressing for a quicker withdrawal from its current action.

“The outlook for the unemployment rate has improved, and the outlook for inflation has risen,” said Narayana Kocherlakota, president of Federal Reserve Bank of Minneapolis, in a speech this month. “My own belief is that we will need to initiate our somewhat lengthy exit strategy sometime in the next six to nine months or so, and that conditions will warrant raising [interest] rates sometime in 2013 or, possibly, late 2012.”

But others argue that unemployment is still so high that the Fed should not do anything to interrupt the recovery.

“I anticipate that we will fall far short in achieving our maximum employment objective,” said the board’s vice chairman, Janet L. Yellen, in a speech this month. “Further easing actions could be warranted if the recovery proceeds at a slower-than-expected pace.”

Only a “significant acceleration,” she added, “in the pace of recovery could call for an earlier beginning to the process” withdrawing support.

Zachary A. Goldfarb is a staff writer covering the White House, focusing on President Obama’s economic, financial and fiscal policy.
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