Ratajczak, Silvia Say Fed Will Monitor U.S. Recovery’s Strength

Donald Ratajczak, an economic consultant for Morgan Keegan & Co., and John Silvia, chief economist at Wells Fargo Securities LLC, said Federal Reserve officials will be monitoring the strength of the U.S. recovery. Fed officials, after a meeting in Washington today, maintained plans to buy $600 billion of Treasuries through June.

Diane Swonk, chief economist at Mesirow Financial Inc.; Dan Greenhaus, chief economic strategist at Miller Tabak & Co. LLC; Chris Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ; and Ward McCarthy, chief financial economist at Jefferies & Co., also spoke today.

Ratajczak:

“The economy now appears to be in a recovery mode, not just a very fragile mode.”

“The Fed is going to carefully monitor whether or not this growth continues.”

“Basically, they know there are still two areas of weakness. Housing is just now trying to bottom. And, of course, the state and local governments are still laying off people. So they would like to see somewhat more overall strength in the economy before they change policy.”

“The next meeting is going to be, ‘Do we really need to continue quantitative easing?’”

“There is no question they will have enough votes for that. My guess is they will have some dissenters at that meeting. And then it will be the longer-term: ‘What will we do after June? Do we sit on rates, but do nothing about purchasing? Or do we start to think about raising rates?’”

“I don’t think they change rates this year. I think they change rates in January of next year.”

The four Fed presidents who have rotated on as voters this year are “going to take their time and try to figure out how to deal with the rest of the members.”

“I would be surprised if there is not dissents” over the next couple of meetings “if the economy continues on its present course.”

Silvia:

“The Fed is keeping policy steady and they will finish the drill.”

“They will finish QE2 and there will be no QE3. They will finish and observe what happens with the economy.”

On lack of much upgrading of economy’s description: “I thought they would have talked about how much the economy has improved.”

“They have got to be cautious about how sustainable and broad-based the recovery is. They are not at a pace that is really bringing down the unemployment rate and they are concerned about that.”

Swonk:

“Threats by Congress to curb the Fed’s independence have a way of uniting foes within the Fed.”

Fed Chairman Ben S. Bernanke “has clearly regained control of messaging, at least for now.”

“Ben has made it very clear that we would need a substantial improvement from where we are to justify a shift in policy. For now, he is not getting a lot of pushback.”

“The Fed is seeking to differentiate inflation in the U.S. from that in developing economies and Europe, where commodity prices play a large role in triggering inflation. Indeed, the deceleration in core inflation that we have seen suggests that rising commodity prices are more of a threat to demand than inflation, especially given the constraints the consumer still faces.”

As for a third phase of quantitative easing, “it all depends on the course of economic growth. There is considerable concern about what will happen to equity prices once the program comes to an end. They will be watching this carefully.”

Greenhaus:

“Whatever concern that existed in the marketplace related to an early withdrawal of accommodative policies has to be further dismissed.”

“They have plenty of room from an inflation and slack standpoint to support the recovery without being concerned about a meaningful move in core prices.”

Rupkey:

“The Fed’s policies seems to be a little out of step, a little bit on a collision course with an expanding economy.”

“There are very few downside risks to the economy right now and my guess is the data will show the unemployment rate falling faster than they think in the months to come.”

McCarthy:

The statement was “about as accommodative as it can get. The most significant difference from December was there was no dissents.”

Philadelphia Fed President Charles Plosser might want to dissent later and may not have dissented today in order “to keep his powder dry later in the year.”

“In the Dec. 14 statement, the FOMC appeared to put an important weighting on unemployment as the key variable to evaluate and they broadened it in this statement to be general labor market conditions.”

“If you took the December 14 statement, you would say the unemployment rate was driving this whole thing. They specifically broadened it so it’s a lower unemployment rate, faster non-farm payrolls” and improvement in other labor market indicators that they’re seeking. “They’re not going to get pinned down.”

“They also acknowledged the divergence between headline and core inflation numbers, but continued to indicate that it’s core inflation that they’re basing their decisions on.”

“I don’t think they will discontinue QE2. It’s not set in stone, but it is pretty close. They want the market to be comfortable with the idea that they are going to continue to support the market with purchases. They’re trying to remove uncertainty.”

To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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