Fed likely to hold steady on stimulus, intrest rates

Fed likely to hold steady on stimulus, intrest rates

Federal Reserve officials are expected to continue pumping money into the economy and keep interest rates near zero as they wrap up their regular policy-making meeting Wednesday amid fresh signs that their massive stimulus effort is gaining traction.

The Fed already has promised to maintain its easy-money policies until the recovery picks up steam. Holding steady now would suggest that the Fed views recent data showing a pickup in job growth and strength in the housing market as a validation of its course of action.

“The Fed is winning,” economists at High Frequency Economics wrote in a research note last week. The numbers “are suggesting significant upward momentum, raising the potential for growth to effectively ‘feed on itself.’ ”

The economy created 236,000 jobs in February, a surprisingly strong number given fears of federal spending cuts. Many of those jobs were in construction, a sector that has rebounded after getting pummeled during the collapse of the housing market. A report by TD Economics estimated the industry would add 400,000 jobs this year. The number of new homes under construction rose to an annual rate of 917,000, according to government data released Tuesday.

Economists credit much of the boom to the Fed’s fueling of rock-bottom mortgage rates that are helping to stoke demand. That is also helping to support higher prices, bringing millions of people out from being underwater on their homes.

But some of the Fed’s biggest critics come from inside its ranks. Richmond Fed President Jeffrey Lacker dissented from every policy vote last year. In January, Kansas City Fed President Esther George took over that role. During that meeting, she argued that the Fed’s stimulus risks overheating the economy in the future — a concern shared by an increasingly vocal group of her colleagues at the central bank and outside economists.

But Fed Chairman Ben S. Bernanke has said repeatedly that withdrawing monetary stimulus now — particularly as Congress bickers over fiscal policy — could stymie the recovery’s momentum. Scott Sumner, a Bentley University economist who writes an influential monetary policy blog called The Money Illusion, said the Fed’s actions are helping to negate fiscal headwinds.

Sumner said it’s possible that a more aggressive and explicit Fed commitment to growth has combined with a healing housing market to produce the most effective round of monetary stimulus in this recovery – a reaction he likened to putting sand under a car’s wheels on an icy road to help the tires catch.

“A lot of people argued that the economy would slow at the beginning of this year because of tax hikes – mainly the payroll tax hikes,” Sumner said. “I argued that was not likely to happen, because the Federal Reserve tends to try to offset the effects of fiscal policy.”