Washington (AFP) – The relentless fall in oil prices and Russia’s plunging currency pose big challenges as the U.S. Federal Reserve opens a two-day meeting Tuesday.
The Fed’s last meeting of 2014 was expected to confirm its path toward monetary policy normalization after holding its base interest rate at the zero level for six years to bring the country out of the Great Recession.
But stagnating economies in Europe and Japan and slowing growth in China, coupled with the threats to markets and the financial system from the oil price and Russian crises, could force the U.S. central bank to weigh a pause.
While the world’s most powerful central bank is unlikely to make any immediate changes to its interest rate and liquidity stance, it could signal via comments and economic forecasts a readiness to stick to that stance for longer than expected to help the global economy through a rough period.
The main focus of the Fed, the U.S. economy, has been growing strongly enough for the central bank to begin pulling away from the extraordinary easy-money policies in place since 2008.
Unemployment has come down to 5.8 percent; job generation in November was unexpectedly strong; and year-end retail sales show consumers comfortable with spending and confident about the year ahead.
The one question that has dogged the members of the Federal Open Market Committee, the Fed’s policy arm, has been inflation: it has been too weak to confirm that the economy is motoring under its own power.
And sinking prices of oil and other key commodities and many general imports have in the past two months slowed inflation even more.
For weeks analysts have guessed that the main outcome of the FOMC meeting would be a change in the language it uses to steer market expectations on interest rate policy.
Over the past year, the panel has repeatedly said that a Fed funds rate increase would only come a “considerable time” after the end of the quantitative easing program, which was wound up in October.
That language could be dropped for an even more opaque qualifier that would give the FOMC more flexibility, to either move quickly if growth and prices pick up unexpectedly, or hold off indefinitely if growth stalls. One Fed official has suggested the FOMC just say it will be “patient” before lifting the rate.
Any other signal change from the meeting would come from the collective forecasts of FOMC members of economic growth, unemployment, inflation and rates, which are studied closely for signs of when a first rate hike will come.
For the past year the general view has been that the Fed would move in the middle of 2015. Economist Chris Low of FTN Financial noted that two senior Fed officials known to be more hawkish on raising interest rates both represent US regions where growth could slow significantly due to the oil price drop.
“They may back away from (their hawkish stance) in their forecasts,” he said.
Even so, the 50 percent fall in the price of crude in just six months could turn the US central bankers’ focus to global issues and how Fed policy might help or hurt the world economy.
The steepness of the fall in crude prices, many fear, could spill over into the financial sector and foment more shock waves through the economy.
And Moscow’s inability to stem the ruble’s slide despite hiking interest rates overnight to 17 percent could further sink its economy and spread collateral damage into already-struggling Europe.
(AFP Photo/Mandel Ngan)