New risks worry Fed, no new action on table

WASHINGTON - Reuters

‘Strains in global financial markets continue to pose significant downside risks,’ says a statement by Ben Bernanke’s Fed. AFP photo

The U.S. Federal Reserve said Dec. 13 that turmoil in Europe presents a big risk to the U.S. economy, leaving the door open to further possible steps to boost growth even though it noted a somewhat stronger labor market.

The central bank said the U.S. economy was “expanding moderately” despite an apparent slowing in the world economy. But while there had been “some” improvement in the job market, unemployment remained elevated and housing depressed, it said.

“Strains in global financial markets continue to pose significant downside risks to the economic outlook,” the Fed said after a policy meeting, alluding to pressures stemming from the debt crisis in the euro zone, which has raised concerns about tighter credit in the United States.

U.S. stock prices fell, while prices for government debt rose. The dollar, which has been pressured by the Fed’s huge-bond-buying programs, gained against the euro.

The Fed’s statement was little changed from the one made after its last meeting in early November, although the U.S. central bank pinned uncertainty for the U.S. economy more squarely on events in Europe.

While in November it said risks to the outlook included global strains, on Dec. 13 it cited only the risk of volatility abroad. Most economists have said the Fed’s next meeting on Jan. 24-25 would be the more likely occasion for any new moves to add to the U.S. central bank’s already extraordinary push to bring down borrowing costs and help growth.

Tuesday’s statement touched only lightly on signs of improvement in the economy’s performance.
“They are certainly ready to lean against the wind should the economy falter,” said Cary Leahey, managing director at Decision Economics in New York.

Communication strategy
The Fed offered no new guidance on the changing way it communicates its policies to financial markets; Fed Chairman Ben Bernanke has made increased transparency a hallmark of his six years in charge of the central bank. It also repeated that it expects inflation to settle at levels at or below those consistent with its price stability mandate.

For a second time running, Chicago Fed President Charles Evans dissented against holding policy steady, saying he favored additional easing now.

The U.S. central bank has held overnight interest rates near zero since December 2008 and has bought $2.3 trillion in government and mortgage-related bonds in a further attempt to stimulate a robust recovery.

Fed officials are divided among those who think high unemployment and sluggish growth require more action and those who view the central bank’s already-aggressive efforts as bordering dangerously on an invitation to inflation.

Some influential policy makers, including Vice Chair Janet Yellen, have suggested they would be inclined to take additional steps if growth fails to pick up.