The US: Fed Still Looking And A Bit More Confident

The US Federal Reserve's latest monetary policy meeting overnight won't alter the way the US economy completes 2012.

There was however signs of more confidence about the economy, though even that was qualified.

The current interest rate regime of 0 to 0.25% was left in place, but there were hints this ultra low interest rate regime could change in the next year to 18 months, if the economy continues to rebound as it has done so far.

But that's if Europe doesn't rear up and terminate the current slow recovery.

As a result yields on US 10 year bonds rose back over 2% and the stockmarket edged higher, but that was more to the strong Apple profit than the Fed's latest statements.

The re-emergence of Europe as a prime source of tension for markets to resume worrying about, came a month or so after the Fed noted that tensions in Europe had eased.

The day and a half meeting concluded early today with the post-meeting statement, then the quarterly growth, unemployment and interest-rate forecast, followed by the now regular press conference with chairman, Ben Bernanke.

The post-meeting statement, the new forecasts and comments from Fed chairman, Ben Bernanke, all gave the impression that there's a stronger belief the present US rebound is going to continue unless the problems in Europe (which are more political than financial at the moment) derail it for a third successive year.

That's why the forecast for GDP growth was lifted to between 2.4% and 2.9% this year, from the 2.2% to 2.7% projections published in January.

The Fed now sees US unemployment at between 7.8% and 8%, down noticeably from the 8.2% to 8.5% predicted in January.

Core inflation is expected to grow at a faster pace between 1.8% and 2% this year, thanks higher price pressures (oil in particular) compared with the 1.5% to 1.8% range see in January.

And, as a result there now seems to be clearer signs that Fed officials are no longer as inclined to delay a tightening of monetary policy.

Even though they reiterated the post-meeting statement overnight said they continue to foresee "exceptionally low levels" for interest rates until the end of 2014, only four Fed officials -- compared to six in January - believe the current rock-bottom interest rates will be appropriate two years from now.

In the post-meeting statement, Fed officials made small changes to its assessment of the US recovery, toning down the description of labour market improvements and noting a recent pick-up in inflation.

And the Fed also said strains in global financial markets continued to pose "significant downside risks" to the US economy, removing their judgment from March that these strains had eased.

Many US economists have wondered if the warm winter weather boosted growth over the end of 2011 and early this year, only to sag as the impact of the weather (more building activity earlier in the year, higher ordering by industry and a rise in new jobs) have subsided.

The last Fed statement after the March 13 meeting appeared weak at the time in light of the then strong data from the fourth quarter and January and February. But that caution now appears appropriate.

The upshot of the latest meeting is that the Fed will do nothing for the rest of 2012, assess the situation in Europe and then look past the elections in November and into 2013 when there could be a sharp cut in spending if there's no agreement on a new spending regime.

If Congress takes no action, the draconian spending cuts will happen, while tax cuts will expire and the combination will could force the economy into a slowdown.

Doing nothing will allow the Fed time to watch what's happening in the economy and in Washington ahead and after the polls in early November.

On a third round of Quantitative Easing, most economists say there was no need for any change in existing policy and that the Fed doesn't have to commit until their next meeting on June 19-20.

This will be just before the Fed's $US400 billion "Operation Twist" program is set to expire (on June 30).

Mr Bernanke told his press conference that the Fed "would not hesitate" to launch another round of bond purchases to drive borrowing costs lower if it looked like the economy needed it.

" We remain entirely prepared to take additional balance sheet actions as necessary to achieve our objectives," Bernanke told reporters.

"Those tools remained very much on the table and we would not hesitate to use them should the economy require that additional support."

So no real change, except a bit more confidence and a hint of a rate rise sometime in 2014, which remains a long way off.

Now its the first estimate of US GDP growth for the March quarter tomorrow night, our time.