Fed Expected to Take Further Step Toward Ending Bond Buying

Wednesday, 30 Apr 2014 06:59 AM

 

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The Federal Reserve is expected to cut its bond-buying program by a further $10 billion on Wednesday as signs mount that the U.S. economy is starting to pull away from its winter slowdown.

Janet Yellen's second policy-setting session as Fed chair should confirm the central bank's plan to wind down its purchases of Treasurys and mortgage-backed securities by year-end — a sign of its confidence the economy is gaining traction.

The reduction likely to be announced at the end of the Fed's two-day meeting would bring the total monthly purchases down to $45 billion, split between $25 billion of Treasurys and $20 billion of mortgage-backed securities.

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But analysts expect little more out of the session as the Fed enters what may be a sort of holding pattern as it transitions from an era of crisis response to one of more normal monetary policy.

The meeting "will probably be a quiet one," with the reduction in purchases "a foregone conclusion," and no fresh economic forecasts from the members of the Fed's policy-making committee, said Goldman Sachs senior economist Kris Dawsey.

A statement outlining the policy decision and the Fed's view of the economy will be issued at 2 p.m. Eastern time.

Little or no change is expected in the Fed's guidance on its key overnight interest rate, which it has kept near zero since the depths of the financial crisis in December 2008.

The Fed changed its guidance in March when it dropped language that said the target rate would not be increased until the unemployment rate fell to at least 6.5 percent.

Unemployment has been steadily approaching that threshold, and now stands at 6.7 percent. But with little sign of inflation, Yellen has said she feels there is still ample "slack" in the economy and a need to keep rates low to continue to support economic growth.

During an April 16 speech in New York, she said the United States may still be more than two years away from what the Fed now regards as the "longer-run normal unemployment rate" of between 5.2 percent and 5.6 percent.

"Thus far in the recovery and to this day, there is little question that the economy has remained far from maximum employment," she said.

The last Fed statement said rates would likely remain near zero "for a considerable time after the asset purchase program ends."

Investors have construed that to mean a rate increase is not likely until the middle of next year. That, however, will depend on the performance of an economy that is expanding, but not generating much upward pressure on wages and prices.

With inflation well below the central bank's 2 percent objective, "We continue to see the Fed erring on the side of caution and moving on the policy rate later rather than sooner," Millan Mulraine, deputy chief economist at TD Securities in New York, wrote in a preview of the Fed meeting.

"Indeed, the elevated level of economic slack, both in the labor market and other sectors of the economy, will ensure that wage pressures stay weak and pricing power among firms remains contained," Mulraine said.

Data on gross domestic product for the first quarter will be released on Wednesday morning. Analysts expect a poor headline result, largely because of an unusually snowy winter that depressed economic activity.

But the underlying trend is much stronger, said Ben Herzon, senior economist with consulting firm Macroeconomic Advisers.

Both the harsh winter and a slowdown in the accumulation of business inventories will produce an annualized GDP growth reading of about 1 percent for the first quarter, he said. But recent data has already shown the economy is bouncing back.

"The economy is continuing to progress," Herzon said. "Not blockbuster, but decent ... The pace of GDP growth is sufficient to keep the unemployment rate moving down."

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© 2014 Thomson/Reuters. All rights reserved.

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