Fed: Recovery may lose steam

By Hibah Yousuf, staff reporter


NEW YORK (CNNMoney.com) -- Federal Reserve policymakers are worried that the economic recovery may lose steam going forward, despite recent moderate improvements, according to minutes from their recent policy meeting released Tuesday.

Though the latest data suggest an uptick in economic activity, Fed members believe that some sectors of the economy could stifle overall growth, the minutes from the March 16 meeting said.

"While participants saw incoming information as broadly consistent with continued strengthening of economic activity, they also highlighted a variety of factors that would be likely to restrain the overall pace of recovery, especially in light of the waning effects of fiscal stimulus and inventory rebalancing over coming quarters," the minutes said.

But Fed policymakers indicated that they could raise rates as soon as they see continued signs of life in the economy, according to the minutes.

The minutes indicated that Fed members believed the central bank's policy of "exceptionally low rates" for "an extended period" is explicitly contingent on the evolution of the economy rather than on the passage of any fixed amount of calendar time." The central bank's current guidance does not limit the Fed from tightening or maintaining its monetary policy, they said.

Fed members previously said that the use of "extended period" referred to three or four meetings, but the new explanation suggests that the Fed's language "could legitimately be used until just before tightening is set to start, and thus does not convey much information about the likely start date of Fed tightening," said Barclays Capital economist Dean Maki in a research note.

At the meeting, the Fed's Federal Open Market Committee continued to hold the target for the key interest rate, the federal funds rate, between 0% and 0.25%, and repeated that economic conditions are likely "to warrant exceptionally low levels of the federal funds rate for an extended period." The key rate is used as a benchmark for how much banks charge consumers and businesses for loans.

For the second straight meeting, Kansas City Fed President Thomas Hoenig voted against the decision to use that language. In the minutes, he reiterated that it would be more appropriate for the Fed to promise "a low level of the federal funds rate for some time."

Such a change, Hoenig said, would allow the Fed to increase that benchmark rate modestly sooner rather than later and avoid "the buildup of future financial imbalances and increase the risk of to longer-run macroeconomic and financial stability."

But Hoenig was alone in his view of altering the language, and the Fed maintained a cautious in its view of the current economic situation.

"Nobody else jumped on the 'We need to tighten' bandwagon, and that says a lot," said John Canally, economist at LPL Financial. "There's not a lot of energy on the committee to raise rates."

Since the last meeting, most economic data, with the exception of the reports on the housing sector, have met or beat expectations, and the Fed will have to acknowledge that, Canally said.

At the meeting, a number of policymakers "pointed out that the economic recovery could not be sustained over time without a substantial pickup in job creation, which they still anticipated but had not yet become evident in the data."

Last week, however, the Labor Department said the economy gained 162,000 jobs in March, more than any other month in the last three years.

Fed members also highlighted concerns about the housing market, where gains are "leveling off" despite government support such as the homebuyer tax credit, and said commercial and industrial real estate markets continue to weaken.

"The housing market is still tenuous. The last thing the Fed wants to do is torpedo any improvements," Canally said. "The Fed does not want to raise rates and be responsible for squashing the recovery and killing the housing market."

But Canally said the market will be listening closely to comments from Fed chairman Ben Bernanke set to be delivered Wednesday in Dallas and Thursday in Washington to understand how the central bank will weigh the recent firm economic data in future policy meetings.  To top of page

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