Federal Reserve Chairman Ben S. Bernanke’s efforts to keep U.S. prices and employment from falling may get a helping hand from China’s decision to let its currency gain against the dollar.
Greater yuan flexibility will eventually raise prices of goods imported to the U.S. after a decline in the consumer price index for two straight months and as some Fed officials voice concern about inflation slowing too much. The move should also eventually increase U.S. exports of aircraft, steel and wheat to China, said Charles Lieberman, a former New York Fed official.
Fed officials, who are likely to repeat the commitment to an “extended period” of low interest rates in a Washington meeting today, are contending with joblessness that’s still close to a 26-year high. China’s announcement on June 19, which pushed global stocks higher, may ease their concerns that Europe’s debt crisis poses a risk to the recovery.
“It implies a little bit of a positive fillip to domestic growth,” said Lieberman, chief investment officer at Advisors Capital Management LLC in Hasbrouck Heights, New Jersey. “It does also imply some upward pressure on import prices, but I don’t think that’s going to be particularly troublesome to the Fed when the unemployment rate is so high.”
At the last Federal Open Market Committee meeting in April, some policy makers saw inflation risks as “tilted to the downside in the near term” because of slack in the economy and the chance price expectations could decline. Other officials said inflation may pick up because of an expanding global economy and U.S. budget deficits.
Since taking over the U.S. central bank four years ago, Bernanke has joined other American officials in urging China to let the yuan appreciate, saying in 2006 that such action would “enhance China’s future growth and stability.”
Bernanke and his colleagues will probably keep interest rates near zero because of “modest” economic growth and an unemployment rate stuck close to 10 percent, said former Atlanta Fed research director Robert Eisenbeis, now chief monetary economist at Cumberland Advisors Inc. in Vineland, New Jersey. The FOMC is scheduled to issue a statement at around 2:15 p.m. Washington time at the conclusion of a two-day meeting, which resumed today at 9 a.m.
The number of Americans applying for jobless benefits rose this month to a one-month high while housing starts in May fell 10 percent. Meanwhile, a 0.2 percent decline in the consumer price index last month was the biggest since December 2008.
Hewlett-Packard Co., the world’s largest personal-computer maker, is planning to cut a net 3,000 jobs, the company said in a June 1 regulatory filing. Hewlett-Packard is eliminating the positions of 9,000 employees and replacing about 6,000 in varying countries.
“The risks are tilted to the downside and there are increased uncertainties,” Eisenbeis said. The FOMC “is clearly concerned about a double-dip recession.”
The U.S. Congress, to reduce unemployment and help manufacturers, should press China through tariff legislation to further raise the value of its currency, Senator Sherrod Brown, a Democrat from Ohio, said yesterday.
“The pressure still needs to be on them from Congress,” Brown said in a Bloomberg Television interview.
Signs of economic frailty give Bernanke more time to delay a rate increase and formulate an “exit strategy” from record stimulus that threatens to eventually fuel a surge in prices. Policy makers are trying to fine tune tools for draining as much as $1 trillion in excess reserves from the banking system, including the use of reverse repurchase agreements and the sale of term deposits to banks.
Investors’ expectations for a Fed rate increase have fallen since the conclusion of the last FOMC meeting in April. Investors are discounting about 40 basis points of tightening over the next 12 months, a decline from about 76 basis points on April 28, according to data that is calculated by Credit Suisse using the overnight index swap curve.
“There’s no reason to pull the plug on riskier asset classes like stocks,” said Mirko Mikelic, who helps oversee $18 billion in fixed-income assets as senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan.
“We do like commodities, like gold, and inflation plays like shipping companies, but you do have to be selective,” he said. Bonds are “a pretty safe play now for the short term,” but the “concern is that when the global economy turns around and the U.S. starts raising rates, people are going to run out on bonds” over the long term.
The impact from the Europe debt crisis on U.S. growth and financial markets will probably “take center stage” at the FOMC meeting, Laurence Meyer, vice chairman of Macroeconomic Advisors LLC in Washington and a former Fed governor, said in a note to clients.
As European leaders tried on May 20 to contain the region’s crisis, the Chicago Board Options Exchange Volatility Index, the benchmark gauge of U.S. stock options known as the VIX, rose on to the highest level in more than a year. It remains above its six-month average.
“What the market is going to be looking for is anything in the statement that says something about Europe,” said John Canally, investment strategist and economist at LPL Financial Corp. in Boston.
Officials “have been accused of whistling past the graveyard in 2006 with the subprime issue, and don’t want to get caught in the same vein where they’re accused of ignoring an issue and being late to react,” he said.
The world’s largest economy grew during the first quarter at 3 percent, down from a 3.2 percent initial estimate due to smaller gains in consumer and business spending.
A stronger yuan should help growth by improving the competitiveness of U.S. exporters to China. The U.S. trade deficit with China reached $71 billion for the first four months of the year, up 5.8 percent from the same period of 2009, according to U.S. government data.
“Given a projection of growth just slightly above trend, the committee will stress that economic conditions dictate no rate increases for the foreseeable future,” said New York University Professor Mark Gertler, who’s collaborated on research with Bernanke. “There is no danger of inflation now. If anything the risks of deflation are greater, given the overall weakness in the economy.”