The Federal Reserve is widely expected to stand pat on Wednesday, keeping its loose fiscal policies in place at the conclusion of two days of meetings.
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A weak jobs report released Wednesday morning by payroll firm ADP can only add to a growing sense that the U.S. economy refuses to gain traction. The ADP National Employment Report said the private sector added just 119,000 jobs in April, an ominous forecast for Friday’s government jobs report for April.
"I don't think they'll give any indication they'll be exiting their bond buying strategy any time soon," said Peter Cardillo, chief market economist at Rockwell Global Capital.
Meanwhile, a report on manufacturing activity released Wednesday showed that important sector also slowed down last month.
The Federal Open Market Committee, which sets most monetary policy, is wrapping up two days of meetings today and will unveil its statement at 2 p.m.
The most likely announcement from Fed members is that the central bank is willing to add to its easy money programs if the economy doesn’t gain strength in the next few months. That’s a big shift from only a month ago when economic data, including a string of monthly jobs reports, suggested a strengthening economy.
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But all that changed with the March jobs report, which showed a paltry increase of just 88,000 jobs. Now Fed members in speeches and interviews have hinted that they’re not opposed to expanding the existing bond buying programs, increasing the amount of purchases from the current level of $85 billion in U.S. Treasuries and mortgaged backed securities a month.
This third round of bond buying, known as quantitative easing, or QE III, was adopted last fall as a measure to keep long-term interest rates -- notably mortgages -- low in order to spur lending and broader economic activity.
The Fed has essentially tied its policies to the housing and labor markets under the notion that a strong housing sector will spread economic growth across a wide spectrum of industries, including construction, financial services and retail. The end result of that domino-effect is ostensibly job creation.
The job market seemed to be gaining traction through the winter but then lost steam last month.
The Fed has said it will keep interest rates at near zero, where they’ve been since December 2009, and continue to buy bonds until unemployment falls to 6.5% or inflation rises to 2.5% annually. Both thresholds seem a long way off.
Unemployment has continued to tick slowly lower, a good thing. But lately inflation has also fallen to a level that is making the Fed uncomfortable. The Fed likes to keep inflation at about 2%, an indication that wages and demand are rising. But wages have been almost stagnant in recent months and demand is low, pushing inflation lower.
The talk a month ago was about gradually scaling back on bond purchases so as not to shake markets too badly. Stock markets have surged as the Fed has pumped money into the economy and any suggestion that quantitative easing may be turned off has prompted stock selloffs.