Stocks are rallying, job growth is strengthening and a housing recovery is well underway -- but don't expect the U.S. Federal Reserve to back away from its stimulative policies just yet.
If anything, the Fed is likely to deliver a buzzkill after its two-day meeting wraps up Wednesday. Fed Chairman Ben Bernanke will also address the state of the economy in a press conference following the release of the Fed's latest statement on interest rates and new economic forecasts.
Instead of celebrating improvement in the economy, Bernanke and the rest of the Fed are more likely to express concern about how significant government spending cuts could dampen economic growth later this year, according to some analysts.
The U.S. economy added 236,000 jobs in February, the strongest growth in three months. Meanwhile, the unemployment rate fell to 7.7%,
but that is unlikely to impress the Fed much, experts say.
Half of the decline in the unemployment rate in February was due to workers dropping out of the job market. And while the addition of 236,000 jobs was a strong number, the central bank wants solid job growth to continue at a consistent pace for several months before it takes its foot off the gas pedal.
The Fed is currently engaged in a controversial policy known as quantitative easing, buying $45 billion U.S. in Treasuries and $40 billion U.S. mortgage-backed securities each month. The goal is to lower long-term interest rates, and thereby stimulate more lending by banks and more spending by businesses and consumers.
But unlike prior rounds of QE, this latest injection of monetary stimulus comes without an end date. Instead the Fed has issued a vague, qualitative guideline. It wants to see the labour market improve "substantially."
Meanwhile, the Fed is also holding short-term interest rates near zero, and doesn't plan to raise rates significantly until unemployment falls to around 6.5% or inflation exceeds 2.5% a year. Based on the latest figures on consumer prices, the annual inflation rate is 2%.
According to the Fed's own forecasts, the unemployment rate is unlikely to fall to 6.5% until at least 2015. The Fed will adjust this and other economic forecasts Wednesday, but outside economists aren't expecting much to change. One analyst is quoted as saying he expects a "brighter tone" from the Fed in its statement but that won't lead to a much stronger growth projection for the economy.
