By Pedro Nicolaci da Costa
WASHINGTON (Reuters) - The Federal Reserve's debate over U.S. monetary policy could begin to shift away from the prospect of reducing stimulus toward a discussion about doing more, given the signs of economic weakness and slowing inflation.
But policymakers are not there yet.
At a two-day meeting that wraps up on Wednesday, the Fed is widely expected to maintain its monthly purchases of $85 billion in bonds to support an economic recovery that is nearly four years old but still too weak for the job market to truly heal.
With the central bank's favored inflation gauge slipping and employment growth faltering, Fed officials could again find themselves in the uncomfortable position of having to shift from talk of curbing stimulus to the possibility of doing more.
Currently, analysts see the Fed buying a total $1 trillion in Treasury and mortgage-backed securities during the ongoing third round of quantitative easing, known as QE3. Until recently, analysts had believed the Fed would start taking the foot off the accelerator in the second half of the year.
Now, things are looking a bit more shaky.
The housing market continues to show signs of strength, with home prices posting their biggest yearly gain since 2006, the year the market began a historic slide that snowballed into a global financial crisis.
However, the industrial sector is not quite as perky. Durable goods orders posted their largest drop in seven months in March, while an index of Midwest manufacturing showed an unexpected contraction in the sector for April.
Economic growth did rebound in the first quarter after a dismal end to 2012, but the 2.5 percent annual rate of expansion fell short of economists' estimates, and economists are already penciling in a weaker second quarter.
At the same time, inflation has steadily been coming down. The Fed's preferred measure of core inflation, which excludes more volatile food and energy costs, rose just 1.1 percent in the year to March. Overall inflation was up just 1 percent, the smallest gain in 3-1/2 years.
The Fed targets inflation of 2 percent.
CHECKING THE TOOLKIT
Despite the economy's softer tone, a wait-and-see attitude seems the most likely approach for now. The Fed is expected to nod to the economy's disappointing performance when it announces its decision at 2 p.m. (1800 GMT), even as it maintains its course.
But if the economy's fortunes do not improve, the U.S. central bank may well look for fresh ways to boost its support to the economy -- increasing the amount of assets it is buying is just one option.
The Fed could announce an intent to hold the bonds it has bought until maturity instead of selling them when the time comes to tighten monetary policy. Fed Chairman Ben Bernanke has already raised this as a possibility.
U.S. central bankers could also set a lower unemployment threshold to signal when the time might be ripe to finally raise overnight interest rates, which they have held near zero since December 2008. Currently, the threshold stands at 6.5 percent, provided inflation does not threaten to breach 2.5 percent.
Research suggests such "forward guidance" about the future path of interest rates can have a strong impact on current borrowing costs, and one Fed official -- Narayana Kocherlakota, president of the Minneapolis Federal Reserve Bank -- has already suggested lowering the threshold to give the economy a boost.
"Forward guidance would be perceived as having lower costs (than bond purchases) by most, I think, and for that reason I think it could be the preferred avenue, especially if more stimulus was projected to be needed for a long period of time," said Roberto Perli, a partner at Cornerstone Macro in Washington and a former Fed economist.
Analysts generally agree that is a debate for the future, if the Fed even gets there at all.
Victor Li, a former regional Fed economist who teaches at Villanova University in Pennsylvania, said employment growth would have to be consistently below the 100,000 jobs per month pace in combination with core inflation of around 1 percent for the Fed to consider a greater easing of monetary policy.
"There is just no evidence that this is going to happen."
Others are less sanguine. Justin Wolfers, an economics professor at the University of Michigan's Gerald Ford School of Public Policy, said the risk that prices will drop persistently, causing further economic damage, cannot be ruled out.
"What's more relevant than the current inflation trend is what this means for forecast inflation," Wolfers said. "And I think even more relevant than the Fed's official point estimate for inflation is the probability that deflation looms as a real threat. Inflation rates lower than 1 percent certainly raise a greater risk of deflation."
(Reporting by Pedro Nicolaci da Costa; Editing by Tim Ahmann and Leslie Adler)
By Tom Bergin
LONDON (Reuters) - Executives from Google Inc. and its auditor Ernst & Young will be called again to a British parliament committee to testify on tax, after a Reuters investigation highlighted inconsistencies in the way Google portrays its activities in Britain, the committee's chairwoman told Reuters.
Margaret Hodge, head of the Public Accounts Committee (PAC), which is tasked with ensuring value in government financial affairs, said she would summon the companies' representatives to explain previous comments to the committee in light of the report. The investigation found that while Google executive Matt Brittin said Google doesn't make sales to UK customers from the UK, some of its staff and UK customers think it does.
Lawyers and academics say that if UK staff did sell to UK customers, that could have implications for Google's tax status in Britain, opening the possibility of much bigger tax bills.
Brittin, Google's Vice President for Northern and Central Europe, told the PAC in November that "Nobody (in the UK) is selling." He said Google employs "a couple of hundred" staff at its European headquarters in Dublin who are responsible for selling to UK clients.
Google's own corporate website claims sales teams are based in London, and advertises jobs for London-based sales staff, whose duties include "negotiating deals", closing "strategic and revenue deals" and achieving "quarterly sales quotas".
Interviews with more than a dozen customers and former staff, and an examination of job advertisements, CVs and endorsements on networking website LinkedIn show many roles that go further than marketing, to actually target, negotiate and close sales of Google's advertising products.
"All the people you tend to deal with are in London," said Simon Andrews, founder of advertising agency Addictive, whose business plans and buys advertising campaigns on behalf of clients. "You would never know about the Dublin thing apart from if you looked closely at the address on the invoices. All the people are based in London."
The profiles of around 150 London-based employees on the LinkedIn networking website said they were involved in formulating sales strategy, managing sales teams, closing deals or other sales work.
Google's Director for External Relations Peter Barron said Brittin denied firmly that he had misled the Committee and the company stood by his comments that no selling was being conducted in Britain. He declined to say whether UK staff did negotiate or close deals but said that all sales to UK clients were transacted with Google Ireland. "We comply with all the tax rules in the UK," he said.
Advertisements for UK staff sometimes refer to sales skills because "we are seeking to attract people with those skills and that background," he added. "We accept that the wording of some job adverts may have been confusing and we are working to make it clearer."
Hodge said, "We will need to very quickly call back the Google executives to give them a chance to explain themselves and to ensure that actually what they told us first time around is not being economical with the truth."
CALL TO ACCOUNTANT
In January, representatives of the ‘big four' accountants - Ernst & Young, PricewaterhouseCoopers, Deloitte and KPMG - also testified to a Public Affairs Committee investigation into their role in helping big companies arrange corporate structures to minimize taxes.
Hodge then asked John Dixon, Head of Tax Policy, at Ernst & Young whether his staff walked around the offices of their clients to check they were conducting the activities in their UK offices that they described in statutory accounts and in statements to the tax authority. Dixon said they did.
Now, Hodge said, the statements on Google's website about its UK activities, its job advertisements and LinkedIn profiles raised questions about whether Ernst & Young's staff had been as diligent as Dixon claimed.
"The evidence they gave was clear and unambiguous... Ernst & Young have questions to answer about whether they were being wholly open with us as a committee," she said.
Ernst & Young declined to comment on Google, citing client confidentiality, but said it stood by Dixon's comments.
"Ernst & Young conducts audits in accordance with International Standards on Auditing," spokeswoman Sarah Jurado said, adding that this included the standard that "requires us to obtain an understanding of the entity and the environment in which the entity operates".
(Edited by Sara Ledwith and Will Waterman)
BANGKOK (AP) — Asian stock markets fell Wednesday in holiday-thinned trading after the pace of China's manufacturing growth slowed in April, raising fears of a weaker recovery in the world's second-largest economy.
The China Federation of Logistics and Purchasing said its purchasing managers' index fell to 50.6 in April from 50.9 in March on a 100-point scale on which readings above 50 indicate an expansion.
The industry group quoted economist Zhang Lijun as saying that steadily declining export orders and other indicators portend a slight decline in economic growth.
Analysts said the data slightly undershot expectations. Most had been expecting a reading of 50.7.
"Although conditions in Asia's industrial sector have improved, they still remain weak by historic standards," said Daniel Martin of Capital Economics in Singapore.
Japan's Nikkei 225 index fell 0.4 percent to 13,811.55 as the yen gained strength against the dollar. Australia's S&P/ASX 200 dropped 0.4 percent to 5,170.80 as investors took profits off the table after the market hit a five-year high Tuesday. New Zealand's benchmark fell while Indonesia rose.
Many stock markets were closed for May Day holidays, including those in Hong Kong, mainland China, South Korea, Singapore and Taiwan.
Among individual stocks, Japan's Sharp Corp. fell 5.6 percent. Kyodo News agency reported that the struggling electronics maker was likely to report a larger-than-expected net loss for fiscal 2012 on May 14. Australia's OZ Minerals fell 4 percent.
U.S. stocks finished modestly higher Tuesday, giving the Standard & Poor's 500 index another record close and its sixth straight month of gains.
The Dow Jones industrial average rose 21.05 points, or 0.1 percent, to 14,839.80. The S&P 500 rose 0.3 percent to 1,597.57. The Nasdaq composite index rose 0.7 percent to 3,328.79.
Benchmark oil for June delivery was down 43 cents to $93.03 per barrel in electronic trading on the New York Mercantile Exchange. The contract fell $1.04 to finish at $93.46 per barrel on the Nymex on Tuesday.
In currencies, the euro rose to $1.3161 from $1.3158 late Tuesday in New York. The dollar fell to 97.29 yen from 97.51 yen.
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