Fed set to keep foot on stimulus pedal

The Federal Reserve is poised to keep its foot firmly on the stimulus pedal as the US economy shows signs of slowing, analysts said.

The Fed policy-setting Federal Open Market Committee (FOMC), which will open a two-day meeting on Tuesday, is widely expected to maintain its extraordinary $85 billion a month bond-purchase program.

The central bank also was seen holding its key interest rate at zero to 0.25 percent, where it has been since December 2008.

The Fed has signaled it would not raise the interest rate at least until unemployment falls below 6.5 percent or if inflation threatens its 2.0 percent annual target rate over the medium term.

The ultra-low rate and the bond purchase program, or quantitative easing, are aimed at tamping down interest rates to spur growth in the economy and support recovery in the battered jobs market, where the unemployment rate is 7.6 percent.

The government's latest data on gross domestic product growth, released Friday, showed the world's largest economy was expanding at a 2.5 percent annual pace in the January-March quarter.

That pace was more sluggish than expected, given that analysts projected the economy would rebound much more strongly from the paltry 0.4 percent growth rate in the fourth quarter.

Economic indicators in recent weeks suggested the economy hit another weak spot in March, which economists say likely reflects the accumulating impact of the January 1 payroll tax increase and the March 1 start of sharp government spending cuts.

The economy added a paltry 88,000 jobs in March, the slowest growth in nine months and far below expectations. The jobless rate dipped a tenth point to 7.6 percent, but mainly because nearly half a million people dropped out of the work force.

The rate of inflation is clearly not strong enough for the Fed to tighten policy. On Monday, the Commerce Department reported that the closely watched price index of personal consumption expenditures fell 0.1 percent in March from February. The price index of core PCE, excluding food and energy, was flat.

"The thing to watch is the Fed's comments on inflation, which has been moving further and further below the Fed's 2.0 percent target for a year now" despite the third round of quantitative easing, IHS Global Insight analysts said in a research note.

The analysts said they would be watching to see if Fed policy makers were worried about disinflation.

"At the very least, we are more confident in our view that QE3 will stay at its current pace through the remainder of the year and into 2014."

Robert Brusca, chief economist at FAO Economics, agreed the Fed would continue full-throttle to stimulate growth.

"The Fed is nowhere close to doing anything to lessen its accommodation. Despite signals from the markets that QE may be distorting stock-bond relationships, the Fed, faced with an even weaker economy, is not about to stop or to let up," Brusca said.

Ryan Sweet of Moody's Analytics suggested that the policymakers should work on a contingency plan for an economic slowdown.

"The economy is beginning to slow, inflation is too low, and the drag from fiscal policy will intensify this quarter and next. The Fed has tools to lessen the fiscal drag somewhat. If the economy doesn't improve, odds are rising that the central bank will move in June."