Nikhil Kumar: Don't expect the Fed to ease off on its bond-buying programme yet

Midweek View: Yes, things did improve, but instead of moving forward we seem to be moving sideways - that's what the figures suggest
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The Independent Online

It's an ongoing source of speculation on Wall Street: when will the policy sages inside the US Federal Reserve yank away the crutches that are keeping the world's largest economy on its feet? Every scrap of economic data, every release from the Fed, is read and re-read for hints, clues, winks, nudges – anything that might indicate when the central bank will roll back, or begin rolling back, its programme of purchasing $85bn (£56bn) of mortgage and government bonds every month.

In this spirit of crystal ball-gazing, what do the bank results so far tell us about what might happen? The March jobs report, which showed a sudden slump in the pace at which American employers are hiring new staff, suggested that the Fed would stick with the bond buys for now, fearing that too early a rollback could imperil the clearly weak recovery. The minutes of the last meeting of the central bank's policy-setting Open Market Committee, on the other hand, showed that some policymakers were eyeing the end of the year as the right time to begin rolling back the stimulus. They didn't say they would do it – but there was no masking the growing sense of unease about the potentially distorting effects of the bond buys.

But if the banking results are anything to go by, it might take a little longer. First, keep in mind the fiscal backdrop. Despite President Barack Obama's much-trumpeted budget "compromises" – trumpeted by the Democrats, that is – there is no sign of any agreement in Washington. The so-called "sequester" has already begun hitting far-flung corners of the country, and it doesn't look as though we'll see a deal on limiting its impact, at least not this year.

It's been like this for a while, and against this uninspiring background, the housing market has been a source of optimism for many. Despite all the wrangling in DC, it showed strength through 2012, so much so that JP Morgan's Jamie Dimon (pictured above) gushed that the market had "turned the corner". Home loans increased, and everything seemed to suggest that the US was building up to a recovery.

A few days ago, however, JP Morgan reported its numbers. Everything appeared to be well. In fact, the bank showed off record profits. "We are seeing positive signs that the economy is healthy and getting stronger. Housing prices continued to improve and new home purchases are also starting to come back," Mr Dimon said.

But then, later in his statement, he added: "The exception is that loan growth across the industry has been softer this quarter, although year-on-year growth remained strong. Small businesses remain cautious about the recovery and fiscal uncertainty, and are not investing their capital."

Then there were figures from Wells Fargo, the country's leading home lender. Again, we were given record top-line figures. But it was impossible not to notice that its mortgage machine had begun slowing.

As it happens, Citigroup, the third bank to post quarterly earnings as part of the current reporting round, probably did have reason to be the most positive. Its investment banking business showed strength, as did its mortgage business, and it set aside less money to cover bad loans. But Mike Corbat, the chief executive who took over after Vikram Pandit's sudden exit last year, was careful with his words. "I think the world continues to be somewhat of a fragile place and I expect the markets to remain volatile."

The updates, then, have the same fundamental message: yes, things did improve, and economic conditions are better; but instead of moving forward, we seem to be moving sideways.

Which suggests that Ben Bernanke and his colleagues at the Fed are not likely to roll back the central bank's bond-buying programme soon. Yes, the stimulus is probably having a distorting effect in parts of the economy, particularly the stock market. But it's a risk that, on balance, the central bank will probably live with, until it is convinced that businesses and consumers are strong enough to keep the economy on its feet.

For now, the Fed can take heart from the fact that both groups are stronger. But there is little to suggest that they are strong enough.