Fed Likely to Keep Monetary Policy on Hold

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A Reuters poll of leading Wall Street economists showed that the Federal Reserve is likely to start hiking interest rates again only in the first half of 2014, after a gap of more than five years, when it slashed them to near zero. The Fed, in December 2008, chopped rates to effectively zero, and also more than tripled the size of its balance sheet to around $2.9 trillion, in response to the deepest recession in decades. According to the poll, the large financial institutions expect the Fed to inject more money into the U.S. economy, but right now, the primary focus will be declaring a new explicit inflation target, and new rate projections. Majority of the financial institutions expect the median of Fed officials’ forecasts for the first interest rate hike to be in the first half of 2014. If the Fed can convince financial markets that it will delay monetary action, previously anticipated, long-term interest rates could drop as the new information will be priced in by investors. The central bank, in view of the recent improvements in the US economy, will probably not reveal any concrete intention of additional bond purchases, but will leave the option open, in case the European banking crisis spills over into the United States. In an effort to provide a greater insight to financial markets and the public, the Fed will start a new practice of announcing policymakers’ interest rate projections when the two-day meeting ends on Wednesday. While the general consensus is that the U.S. economy, in the last three months of 2011, grew at a 3 percent annual rate, Fed officials in all likelihood will not give any explicit hints of further monetary easing. However, many analysts think that if the European crisis deepens, the U.S. recovery will also be affected, and that might prompt the Fed to get into another round of bond buying, probably one focusing on mortgage debt.

The Fed will release a statement at 12:30 p.m., outlining its views on the economy and monetary policy, and at 2 p.m., the rate projections, along with regular quarterly economic forecasts, will be released.

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