Fed to Pursue QE Even as Business Lending Gains
The Federal Reserve will probably push forward with $600 billion in securities purchases even as the biggest jump in business loans in more than two years adds to signs the U.S. economy is gaining strength.
Commercial and industrial loans increased at an annual rate of 7.6 percent last month, the largest gain since October 2008, according to Fed data. Total bank credit has risen in three of the past six months as business loans cushioned against declines in real estate and consumer credit.
Fed Chairman Ben S. Bernanke and his fellow policy makers will probably note improvements in the economy such as higher consumer spending in a statement to be released tomorrow, former Fed governor Lyle Gramley said. Encouraging signs like firmer bank credit are unlikely to prompt a reduction in stimulus so long as growth remains weak and unemployment persists near 10 percent, he said.
“The Fed is not ready to let up on its accelerator,” said Gramley, senior economic adviser for Potomac Research Group in Washington. “They are going to be impressed with the fact the economy has gained some momentum, but there are still strong headwinds to growth, and bank lending is quite modest.”
The Federal Open Market Committee began its two-day meeting at around 1 p.m. today and will release a policy statement at around 2:15 p.m. tomorrow.
Policy makers will probably affirm their plan to buy Treasury securities through June to reduce long-term yields and spur lending, said Mark Gertler, a New York University professor and research co-author with Bernanke.
Close to Zero
Since reducing its target federal funds rate to near zero in December 2008, the central bank has used its balance sheet as a monetary policy tool. Its assets have tripled to $2.43 trillion from $873 billion in February 2008.
The committee may continue to describe credit as “tight” while acknowledging a pickup in growth in the fourth quarter to the fastest pace in three quarters, Gramley said.
Gross domestic product rose last quarter at a 3.5 percent annual rate, up from 2.6 percent in the previous three months, according to the median estimate of 67 economists surveyed by Bloomberg News before a Jan. 28 Commerce Department report.
Bernanke probably won’t be in a hurry to withdraw stimulus with joblessness persisting at 9.4 percent and inflation low, Gertler said. The Fed will probably affirm its pledge to keep interest rates low for an “extended period.”
“This is likely to be a stay-the-course meeting,” Gertler said.
When weighing the timing for a withdrawal of stimulus, the Fed will look for a sustained rise in credit such as business loans, said Paul Kasriel, chief economist at Northern Trust Corp. in Chicago. This would signal banks are deploying record reserves, potentially rekindling inflation, he said.
“That is going to be a tipoff that the Fed has to start an exit strategy” from its stimulus, said Kasriel, a former research economist at the Chicago Fed. “We are not there yet.”
Treasury yields have risen amid signs of a stronger economy. The yield on the 10-year note increased to 3.36 percent at 1:11 p.m. today in New York from 2.57 percent after the Nov. 3 FOMC meeting, when the asset purchases were announced.
Yields have increased because of “a stronger economy and better expectations,” Bernanke said at a forum in Arlington, Virginia on Jan. 13.
Jim Comiskey, a senior market strategist at Lind-Waldock in Chicago, disputed that view, saying yields have risen on concern that Fed bond purchases will stoke inflation.
“The market is scared about the inflationary impact of what the Fed is currently doing,” Comiskey said.
The personal consumption expenditures index excluding food and energy rose 0.8 percent in November from a year earlier, according to Commerce Department data released last month. Including all items, prices rose 1 percent. That’s less than policy makers’ long-term goal for inflation of 1.6 percent to 2 percent.
Fed officials will update their economic forecasts at the meeting beginning today. In their forecasts at the Nov. 2-3 meeting, most central bankers saw inflation excluding food and energy ranging from 0.9 percent to 1.6 percent this year and from 1.0 percent to 1.6 percent in 2012.
Since the announcement of the Fed’s asset purchases on Nov. 3, the dollar has risen 3.7 percent against the euro as of yesterday in New York and the Standard & Poor’s 500 Index has climbed 7.8 percent.
The premium that investment-grade companies pay to borrow above government debt narrowed to 1.59 percentage points yesterday from 1.78 points on Nov. 3, according to Bank of America Merrill Lynch index data.
Marathon Oil Corp., the largest refiner in the U.S. Midwest, announced Jan. 13 that it secured $4.5 billion in loans from banks including Morgan Stanley and JPMorgan Chase & Co., reviving a plan to spin off its fuel-making business that had been delayed in 2008 by turmoil in financial markets and falling commodity prices.
“The economy’s debt level is so high it will make it extremely difficult for the Fed to begin raising borrowing costs in the near future,” Komileva said. The central bank probably won’t begin to raise rates until the middle of next year, she said.
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