There is not much that the Federal Reserve will be able to do this week and the struggling US economy should not expect to see any help from them. The buildup of inflation pressures limits their options once the bond buying program expires at the end of the month.
By Tom Barkley
Of DOW JONES NEWSWIRES
JUNE 20, 2011, 8:30 A.M. ET
Wall Street Journal
WASHINGTON (Dow Jones)--The struggling U.S. economy shouldn't expect any handouts from Washington this week, with no further stimulus seen forthcoming from the Federal Reserve.
Fed officials will be fretting over renewed signs of economic weakness during policy meetings Tuesday and Wednesday, but a buildup in inflation pressures limits their options for providing any additional support once the $600 billion bond-buying program runs its course at the end of the month.
A report last week showing the biggest gain in underlying consumer prices in nearly three years poured cold water on speculation that the Fed may soon embark on so-called QE3--or a third round of Treasury purchases aimed at keeping interest rates at ultralow levels. Indeed, many Fed watchers don't anticipate any change in tone in the communique that will emerge from the meeting.
The bigger-than-expected pickup in core inflation--which strips out volatile food and energy costs--to a 1.5% annual rate in May would normally "trigger a shift in Fed rhetoric," said Robin Brooks, a currency strategist with Goldman Sachs in New York.
"However, the unexpected weakness in growth and uncertainty about the effect of temporary factors will likely keep policy communication unchanged for now," said Brooks.
Capital Economics dialed back last week some of its anticipation of dollar gains through next year, with the lingering risk of another round of asset purchases by the Fed down the road likely to hang over the dollar.
Paul Ashworth, chief U.S. economist at the Toronto-based firm, said the Fed may acknowledge the loss of momentum in the recovery, but that there is little prospect of further monetary stimulus this year.
As Fed Chairman Ben Bernanke said earlier this month, "monetary policy cannot be a panacea."
But while there's only so much the Fed can do to spur demand, help is unlikely to come from a Congress locked in a battle over budget cuts. U.S. President Barack Obama has floated the idea of extending a payroll-tax holiday during the debt talks to help shore up the economy in the short run, but Republicans remain cool to the proposal.
"Temporary booster shots don't work," House Budget Committee Chairman Paul Ryan (R., Wis.) said Thursday.
Bernanke last week urged both sides to quickly come up with a long-term plan to bring the budget under control, while warning against causing any sudden fiscal contractions.
-By Tom Barkley, Dow Jones Newswires; 202-862-9275; tom.barkley@dowjones.com
--Jon Hilsenrath, Luca Di Leo and Kristina Peterson contributed to this article.
To see original article CLICK HERE
