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Vince Fortunato, left, interviews a job applicant during a hiring event at a job centre in San Francisco (Justin Sullivan/Getty Images)
Vince Fortunato, left, interviews a job applicant during a hiring event at a job centre in San Francisco (Justin Sullivan/Getty Images)

Analysis

More easing not off the table for Fed Add to ...

Just because the U.S. economic recovery is looking up, don't think the Federal Reserve will necessarily stop its bond buying after its latest $600-billion program.



While financial markets have largely dismissed the possibility the Fed could extend the program past its end-June sunset date, officials are still wrestling with whether more might need to be done.

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The idea of laying groundwork for an exit from the central bank's extraordinarily easy monetary policy has not yet entered into the equation.



"It is too early to declare victory," Atlanta Federal Reserve Bank president Dennis Lockhart said on Monday.



Kansas City Fed leader Thomas Hoenig said on Tuesday another round of bond purchases could be discussed at the Fed's next policy meeting in mid-March if the recovery flags.



Fed Chairman Ben Bernanke makes a rare on-the-record media appearance on Thursday. He could provide more clarity on whether the Fed is prepared to buy more bonds on top of a current $2.3-billion total if the U.S. jobs market fails to heal.



That the debate has yet to shift away from whether more bond buying might be needed indicates how much farther the Fed thinks the recovery must run before it is time to tighten policy.



When the central bank issued a somber economic assessment after a policy meeting last week, financial markets were disappointed.



The Fed focused on headwinds facing the recovery, while many market participants had looked for more of a nod to a brightening outlook characterized by stock market gains, stronger consumer and factory activity, and a gradually improving jobs picture.



A rise in bond yields, particularly among longer-dated securities, suggests investors are increasingly confident the economic recovery is sufficiently on track to avoid further Fed easing actions.



"For market participants ... the longer policy is kept unchanged, the more uncertainty is raised with respect to the Fed's inflation-fighting credibility," Michelle Girar, an economist with the Royal Bank of Scotland, wrote to clients.



Further bond buying would surely grate on international critics of the policy who blame the latest wave for weakening the U.S. dollar and unleashing a wave of capital into emerging markets, undercutting their exports and inflating asset bubbles.



At the same time, domestic inflation concerns have echoed on Capitol Hill. Lawmakers have attacked the bond buying initiative -- dubbed QE2 since it is the second round of so-called quantitative easing -- for stepping into the area of fiscal policy, and have proposed stripping the Fed of the full employment side of its mandate to have it focus solely on prices.



The Fed guards its independence jealously and is unlikely to let fear of disapproval by politicians guide its course. But at the margins, the furor that greeted the bond buying could weigh on policy makers' minds.



"The reason not to do quantitative easing three will not be as much an economic question as 'Is it politically wise ... to generate the controversy that they did last time?'," said Cary Leahey of Decision Economics in New York.



Many analysts have revised up their growth forecasts for 2011 and pulled forward the time at which they think the central bank will begin to drain reserves from the financial system, sell off some of the mountain of assets it has bought since early 2009, and begin raising interest rates.



The Fed itself will make public in two weeks new forecasts that are expected to show policy makers have also grown more optimistic on growth for the coming year.



Nevertheless, the central bank has stressed after its two most recent meetings that the recovery is not strong enough to make much of a dent in an unemployment rate that stood at a troubling 9.4 per cent in December.



The debate over whether to extend bond buying will come front and centre as soon as the next meeting of the Fed's policy-setting committee on March 16. The issue should dominate the two subsequent meetings before the program is due to be complete at the end of June.



The debate over further easing will revolve around the jobs picture. Consecutive strong monthly gains in payrolls would be a reason to hold off stimulative measures, and could trump a high unemployment rate if it is clear formerly discouraged workers are reentering the job hunt.



Although fears of an outright downward deflationary spiral have receded, inflation has yet to rise to the level where officials would like to see it.



A measure of inflation preferred by the Fed -- the personal consumption expenditures price index, excluding food and energy -- in December registered it smallest 12-month gain on records that date to 1959.



Inflation expectations remain low enough by some measures that some policy makers are likely to argue the Fed does not need to be in any rush to remove economy-boosting policies despite evidence growth is firming.



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