Fed seen maintaining QE pace to avert a fourth summer slump

‘Strong Message’

“There’s a very strong message to the Fed here, which is that it’s too early to even think about exiting from easy policy,” said Ethan Harris, co-head of global economics research at Bank of America Corp. in New York. “This report suggests that they’re missing on both of their mandates: Inflation is too low and the labor market is too weak.”

The concern this year is that a promising start will be derailed by across-the-board federal budget cuts known as sequestration. In years past, shocks from Europe, Japan and the Middle East roiled U.S. financial markets and the economy.

In January 2010, policy makers forecast economic growth of 2.8% to 3.5% for the year, and in March they allowed the Fed’s $1.7 trillion first round of large-scale asset purchases to end.

Deflation Risk

Then the debt crisis in Greece hammered U.S. stocks, with the Standard & Poor’s 500 sliding 16% from late April through the beginning of July. Concerned about the risk of Japanese-style deflation, the Fed started a second, $600 billion round of quantitative easing. The economy ended up growing 2.4% in the fourth quarter of 2010 over the same period of the previous year.

By the start of 2011, optimism had returned, with the S&P 500 gaining 2.2% in January. At the FOMC’s meeting that month, policy makers forecast growth of as much as 3.9%. In June 2011, central bankers let their asset purchases end as scheduled.

Yet repeated shocks jolted the economy. Political upheaval in the Middle East sent oil prices soaring. A tsunami and earthquake in Japan disrupted global manufacturing supply chains. And U.S. lawmakers struggled to reach an accord to raise the debt ceiling.

The S&P 500 peaked for the year on April 29 and fell 19% by Oct. 3. The Fed responded with a stimulus known as Operation Twist, driving down bond yields by swapping short-term debt for long-term bonds. The economy grew 2%.

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