DC AHEAD: US Economy Can't Expect Much Help From Fed Amid Inflation Risks

Townhall.com Staff
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Posted: Jun 20, 2011 11:33 AM
DC AHEAD: US Economy Can't Expect Much Help From Fed Amid Inflation Risks
WASHINGTON (Dow Jones)--The struggling U.S. economy shouldn't expect any handouts from Washington this week, with no further stimulus seen forthcoming from the Federal Reserve.

Fed officials will be fretting over renewed signs of economic weakness during policy meetings Tuesday and Wednesday, but a buildup in inflation pressures limits their options for providing any additional support once the $600 billion bond-buying program runs its course at the end of the month.

A report last week showing the biggest gain in underlying consumer prices in nearly three years poured cold water on speculation that the Fed may soon embark on so-called QE3--or a third round of Treasury purchases aimed at keeping interest rates at ultralow levels. Indeed, many Fed watchers don't anticipate any change in tone in the communique that will emerge from the meeting.

The bigger-than-expected pickup in core inflation--which strips out volatile food and energy costs--to a 1.5% annual rate in May would normally "trigger a shift in Fed rhetoric," said Robin Brooks, a currency strategist with Goldman Sachs in New York.

"However, the unexpected weakness in growth and uncertainty about the effect of temporary factors will likely keep policy communication unchanged for now," said Brooks.

Capital Economics dialed back last week some of its anticipation of dollar gains through next year, with the lingering risk of another round of asset purchases by the Fed down the road likely to hang over the dollar.