Quantcast
Get breaking news alerts via email

Click here to manage your alerts
FILE - In this July, 18, 2013, file photo shows Federal Reserve Chairman Ben Bernanke, testifing before the Senate Banking, Housing, and Urban Affairs Committee hearing on "The Semiannual Monetary Policy Report to the Congress” on Capitol Hill in Washington. The Federal Reserve is expected to take its first step toward reducing the extraordinary stimulus it’s supplied to help the U.S. economy rebound Wednesday Sept. 18. (AP Photo/Manuel Balce Ceneta, File)
Fed likely to slow bond buys despite tepid economy
First Published Sep 16 2013 09:18 am • Last Updated Sep 16 2013 09:18 am

WASHINGTON • Hiring is soft. Pay is barely up. Consumers are cautious. Economic growth has yet to pick up.

And yet on Wednesday, the Federal Reserve is expected to take its first step toward reducing the extraordinary stimulus it’s supplied to help the U.S. economy rebound from its deepest crisis since the Great Depression.

Join the Discussion
Post a Comment

If it does, the Fed will likely spark a debate: Has the economy strengthened enough to withstand the pullback?

The answer might not be clear for months.

The Fed is meeting this week at a time of deepening uncertainty about who will succeed Chairman Ben Bernanke when his term ends in January. On Sunday, Lawrence Summers, who was considered the leading candidate, withdrew from consideration.

Summers’ withdrawal followed growing resistance from critics. His exit could open the door for his chief rival, Janet Yellen, the Fed’s vice chair. If chosen by President Barack Obama and confirmed by the Senate, Yellen would become the first woman to lead the Fed.

For months, the Fed has said it will slow its $85 billion-a-month in Treasury and mortgage bond purchases once the outlook for the job market has improved substantially. Those purchases have been designed to keep long-term loan rates low to get people to borrow and spend and invest in the stock market.

Super-low rates are credited with helping fuel a housing comeback, support economic growth, drive stocks to record highs and restore the wealth of many Americans.

Few think the Fed will significantly reduce its bond purchases — not now, anyway. Many economists think the Fed will announce when its two-day policy meeting ends Wednesday that it will slow its purchases by $10 billion — to $75 billon a month.

The pullback is expected to come from the Fed’s Treasury purchases. It will likely maintain the pace of its mortgage bond buying to try to keep home-loan rates down to sustain the housing rebound.


story continues below
story continues below

Some had once expected a sharper first reduction in the Fed’s purchases of around $20 billion a month. But that was before the government said that job growth was only modest in August and that employers added many fewer jobs in June and July than previously thought.

So why do economists think the Fed will reduce its stimulus for the economy at all?

In part, some Fed officials don’t think the bond purchases are doing much good anymore. And they feel that by continuing to flood the financial system with cash, the Fed might be raising the risks of high inflation or dangerous bubbles in assets like stocks or real estate. Just the mention of a slowdown in bond purchases spooked investors. Some fear that the Fed’s ultra-low-rate policies distorted the prices of some assets.

In addition, the Fed eventually needs to sell its vast investment portfolio, which is on track to top $4 trillion next year, without upsetting markets. The more the Fed expands its portfolio, the harder and more perilous the eventual sell-off could be.

And because the Fed has been raising expectations that its pullback will start as soon as September, some Fed officials may worry that defying those expectations would rattle investors.

Finally, there’s Bernanke’s expected departure in January. If the Fed is going to slow its stimulus, officials may not want to wait until their last meeting of the year in December, just before a new chairman takes over. That’s, in part, why some think a pullback in bond purchases will be announced Wednesday.

"Bernanke may well want to have a bond-reduction program in place before a new chairman comes in," said David Wyss, a former chief economist at Standard & Poor’s and now an economics professor at Brown University.

All that said, it’s possible the Fed will choose not to slow its bond purchases now. In recent public remarks, some Fed officials have sounded uncertain that the economy and the job market have improved enough.

Once the Fed announces its decisions Wednesday, it will issue updated forecasts for the economy and Bernanke will hold a news conference.

Analysts expect the Fed to downgrade its economic outlook for 2013 from its previous forecast in June. That forecast estimated that the economy would grow at a still-sluggish annual rate between 2.3 percent and 2.8 percent this year. Through the first six months of 2013, the economy has grown at a much slower 1.8 percent rate.

Many think the Fed will try to cushion the response to a pullback in long-term bond purchases by stressing it has no intention of raising short-term interest rates anytime soon. The Fed has said it expects to keep its benchmark short-term rate near zero at least until the unemployment rate falls to 6.5 percent — as long as the inflation outlook remains mild.

Next Page >


Copyright 2014 The Salt Lake Tribune. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Top Reader Comments Read All Comments Post a Comment
Click here to read all comments   Click here to post a comment


About Reader Comments


Reader comments on sltrib.com are the opinions of the writer, not The Salt Lake Tribune. We will delete comments containing obscenities, personal attacks and inappropriate or offensive remarks. Flagrant or repeat violators will be banned. If you see an objectionable comment, please alert us by clicking the arrow on the upper right side of the comment and selecting "Flag comment as inappropriate". If you've recently registered with Disqus or aren't seeing your comments immediately, you may need to verify your email address. To do so, visit disqus.com/account.
See more about comments here.
Staying Connected
Videos
Jobs
Contests and Promotions
  • Search Obituaries
  • Place an Obituary

  • Search Cars
  • Search Homes
  • Search Jobs
  • Search Marketplace
  • Search Legal Notices

  • Other Services
  • Advertise With Us
  • Subscribe to the Newspaper
  • Access your e-Edition
  • Frequently Asked Questions
  • Contact a newsroom staff member
  • Access the Trib Archives
  • Privacy Policy
  • Missing your paper? Need to place your paper on vacation hold? For this and any other subscription related needs, click here or call 801.204.6100.