Economy recovery continues, Fed committee report says, but outlook cloudy

According to information released to the Federal Open Market Committee, a committee of the Board of Governors of the Federal Reserve System, the U.S.’ economic recovery is on firmer footing than it was in January. Overall conditions in the labor market appear to be gradually improving, a release from the committee says.

Despite the slow improvement, risks remain to the economy and U.S. consumer.

“Household spending and business investment in equipment and software continue to expand,” the report says. “However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Commodity prices have risen significantly since the summer, and concerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks. Nonetheless, longer-term inflation expectations have remained stable, and measures of underlying inflation have been subdued.”

Recent food and fuel cost rises are likely temporary, the report says. However, it is keeping a close eye on inflation.

“To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the committee decided today to continue expanding its holdings of securities as announced in November,” the report says.

The committee voted last week to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011.

In a recent report, Robert W. Baird & Co. Chief Investment Strategist Bruce Bittles said the economy is likely to slow for the second half of the year, despite recent rises in the equity markets.

“The combination of fiscal cutbacks, rising food and energy costs and the expiration of QE2 in June could create a stiff headwind this summer for the economy and stocks,” Bittles wrote. “The prospects for a continuation of the bull market will also depend on the quality of the next rally that is expected to carry stocks to new highs in the months directly ahead. Prerequisites for extending the rally beyond the second quarter include continued broad participation, a rise in the number of issues hitting new 52-week highs and bridled investor enthusiasm. The sectors expected to outperform are those that benefit from the Bernanke printing machine, including energy, materials and industrials.”

 

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