After a two-day meeting, Fed officials said the economy had 'decelerated somewhat' over the first half of the year, and gave a stronger signals they may take further action as they keep a close watch on the US recovery.
Weakness in the US economy has been underlined since the last Fed meeting by disappointing jobs reports and a sharp slowdown in US growth, which had led to speculation that the Fed might act. After two days of falls US stock markets had rallied ahead of the statement as investors expected action. But the Dow Jones turned negative when it became clear no action would be forthcoming.
'The committee will closely monitor incoming information on economic and financial developments, and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability', the central bank said in a statement issued at the end of the Federal open market committee's (FOMC) two-day policy meeting.
Fed chairman Ben Bernanke has consistently stated that the Fed is considering further action should the recovery appear to be stalling.
There were fresh signs of weakness on Wednesday as a key poll showed economic activity in the manufacturing sector contracted in July for the second month in a row after 34 consecutive months of expansion. The Institute of Supply Management's purchasing managers index (PMI) – which measures the acquisition of goods and services – stood at 49.8% in July, barely moving from June's reading of 49.7%. The index must be above 50% to indicate growth.
Dan Greenhaus, chief global strategist at BTIG, said the Fed was 'clearly on a knife's edge with respect to providing additional stimulus'. Fed statements are parsed line by line for indications of change in policy.
In a note to clients, Greenhaus wrote: 'Importantly, the first sentence in the FOMC statement, which noted in June that 'the economy has been expanding moderately this year' now says that 'economic activity decelerated somewhat over the first half of this year'.
'They note that 'household spending has been rising at a somewhat slower pace than earlier in the year' while 'inflation has declined since earlier this year.' All told, the Fed clearly took down its assessment of the current economic situation'.
Ken Goldstein, an economist at the Conference Board in New York, said the Fed was in a fix. Republicans have already criticised the Fed's actions and are likely to pounce on any action from the Fed ahead of November's election.
'This is going to get increasingly political as the election approaches', Goldstein said.
Goldstein said the economy seemed to be 'muddling along rather than falling off a cliff', and that he believed the Fed was unlikely to act unless evidence of a severe weakening in the US economy emerged.
With economy emerging as the key battleground of the 2012 election, economic indicators have seldom been more closely watched. Last week the commerce department announced that US gross domestic product (GDP) – the broadest measure of an economy's health – stood at 1.5% in the second quarter, down from 2% in the prior three months, and 4.1% in the fourth quarter of 2011.
The number was seized by Republican presidential candidate Mitt Romney as evidence of president Barack Obama's failure to turn around the US economy.
On Friday, the US labour department will unveil the latest non-farm payroll figures, a monthly tally of the number of jobs the US is creating, and the most politically sensitive poll of the lot. Last month, the US created just 80,000 new jobs, but this month economists are expecting 100,000 – a break-even point for the jobs market, but well behind the 200,000-plus jobs the US was creating in the winter months.
There were some good signs for Obama on Wednesday. Private businesses hired 163,000 people last month, according to the latest poll by payroll processor Automatic Data Processing and consultancy Macroeconomic Advisers. The number was well above expectations. Economists' surveyed by Dow Jones has expected 108,000 new jobs.
Chrysler, saved from collapse by the Obama administration, also announced a 13% rise in car sales for July. On Monday the car firm announced a second quarter profit as US car sales boomed.
'I think the Fed is likely to err on the side of caution. We are muddling through, albeit slowly', said Goldstein.
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