WASHINGTON: Many investors expect the U.S. Federal Reserve to announce a shift in course Wednesday and take its first step toward slowing the economic stimulus it has supplied since the financial crisis and the Great Recession swept through the economy five years ago.
What investors don't want are surprises when the U.S. central bank meets. It's assumed the Fed will change course carefully, with a small cut in its monthly Treasury and mortgage bond purchases _ from $85 billion to perhaps $75 billion.
Those purchases have helped keep long-term loan rates ultra-low to encourage borrowing and spending. The Fed is also expected to stress that while it's slowing its bond purchases, it plans no change anytime soon in its benchmark short-term rate. It's kept that rate at a record low near zero since 2008.
Investors will be watching for anything the Fed says about this rate, which affects rates on countless business and consumer loans.
There are four key events to look out for Wednesday: a statement the Fed will issue when its two-day meeting ends; the Fed's updated economic outlook; one of Chairman Ben Bernanke's last news conferences before his term ends in January; and the reaction of investors.
The Fed's end-of-meeting statement is where it would announce its first slowdown in bond purchases. Many economists expect the cut to come entirely from the Fed's $45 billion a month in Treasury bond purchases.
That would leave untouched its $40 billion a month in mortgage bond purchases. The reasoning is that mortgage bond buying is intended to keep downward pressure on mortgage rates.
The Fed likely doesn't want to diminish its support for the housing market, whose gradual but steady comeback has been a pillar for the U.S. economic recovery. The statement is also where the Fed could strengthen its commitment to keep its key short-term rate at a record low.
In December, the Fed began saying it expects to keep this rate near zero at least until unemployment falls to 6.5 percent _ as long as the inflation outlook remains mild.
Unemployment is now 7.3 percent. And in the past 12 months, consumer prices are up 1.5 percent, below the Fed's 2 percent inflation target.
The Fed will also update its economic outlook Wednesday, based on individual forecasts of board members and regional bank presidents.
It's likely to downgrade its outlook as it takes account of reality: The U.S. economy hasn't grown as fast this year as the Fed had expected. In their previous forecast three months ago, Fed officials predicted that the economy would grow between 2.3 percent and 2.6 this year and between 3 percent and 3.5 percent next year.
Most economists think the economy will have grown 2 percent _ at best _ this year and roughly 2.6 percent next year. The Fed will update its forecasts for unemployment and inflation, too. Besides updating its outlook for 2013, 2014 and 2015, the Fed will offer its first economic predictions for 2016.
These numbers will be watched for any hint that the Fed has grown more or less optimistic. Bernanke's news conference will be a major event, as it is his next-to-last news conference as chairman before his term ends Jan. 31.
Early this week, Lawrence Summers withdrew from consideration for the chairman's job, leaving the Fed's vice chair, Janet Yellen, as the leading candidate. President Barack Obama could announce his choice later this month. As always, Bernanke will use his news conference to try to clarify any decisions the Fed announces.
At his June news conference, he said the slowdown in bond purchases would likely start before year's end and be completed by mid-2014. He stressed that any Fed moves to scale back its support would depend on how the economy fares.
But investors responded in panic to the prospect that the Fed would soon reduce its support for the economy. The Dow Jones industrial average sank 560 points in two days. Investor response to a pullback in bond purchases is expected to be mild if the Fed announces a slight reduction of around $10 billion a month.
That's particularly true if the Fed balances its move by underscoring its commitment to keep its benchmark rate low far into the future. If the Fed surprises everyone and decides against trimming its bond purchases at all, the markets may just rally.
indiatimes.com
What investors don't want are surprises when the U.S. central bank meets. It's assumed the Fed will change course carefully, with a small cut in its monthly Treasury and mortgage bond purchases _ from $85 billion to perhaps $75 billion.
Those purchases have helped keep long-term loan rates ultra-low to encourage borrowing and spending. The Fed is also expected to stress that while it's slowing its bond purchases, it plans no change anytime soon in its benchmark short-term rate. It's kept that rate at a record low near zero since 2008.
Investors will be watching for anything the Fed says about this rate, which affects rates on countless business and consumer loans.
There are four key events to look out for Wednesday: a statement the Fed will issue when its two-day meeting ends; the Fed's updated economic outlook; one of Chairman Ben Bernanke's last news conferences before his term ends in January; and the reaction of investors.
The Fed's end-of-meeting statement is where it would announce its first slowdown in bond purchases. Many economists expect the cut to come entirely from the Fed's $45 billion a month in Treasury bond purchases.
That would leave untouched its $40 billion a month in mortgage bond purchases. The reasoning is that mortgage bond buying is intended to keep downward pressure on mortgage rates.
The Fed likely doesn't want to diminish its support for the housing market, whose gradual but steady comeback has been a pillar for the U.S. economic recovery. The statement is also where the Fed could strengthen its commitment to keep its key short-term rate at a record low.
In December, the Fed began saying it expects to keep this rate near zero at least until unemployment falls to 6.5 percent _ as long as the inflation outlook remains mild.
Unemployment is now 7.3 percent. And in the past 12 months, consumer prices are up 1.5 percent, below the Fed's 2 percent inflation target.
The Fed will also update its economic outlook Wednesday, based on individual forecasts of board members and regional bank presidents.
It's likely to downgrade its outlook as it takes account of reality: The U.S. economy hasn't grown as fast this year as the Fed had expected. In their previous forecast three months ago, Fed officials predicted that the economy would grow between 2.3 percent and 2.6 this year and between 3 percent and 3.5 percent next year.
Most economists think the economy will have grown 2 percent _ at best _ this year and roughly 2.6 percent next year. The Fed will update its forecasts for unemployment and inflation, too. Besides updating its outlook for 2013, 2014 and 2015, the Fed will offer its first economic predictions for 2016.
These numbers will be watched for any hint that the Fed has grown more or less optimistic. Bernanke's news conference will be a major event, as it is his next-to-last news conference as chairman before his term ends Jan. 31.
Early this week, Lawrence Summers withdrew from consideration for the chairman's job, leaving the Fed's vice chair, Janet Yellen, as the leading candidate. President Barack Obama could announce his choice later this month. As always, Bernanke will use his news conference to try to clarify any decisions the Fed announces.
At his June news conference, he said the slowdown in bond purchases would likely start before year's end and be completed by mid-2014. He stressed that any Fed moves to scale back its support would depend on how the economy fares.
But investors responded in panic to the prospect that the Fed would soon reduce its support for the economy. The Dow Jones industrial average sank 560 points in two days. Investor response to a pullback in bond purchases is expected to be mild if the Fed announces a slight reduction of around $10 billion a month.
That's particularly true if the Fed balances its move by underscoring its commitment to keep its benchmark rate low far into the future. If the Fed surprises everyone and decides against trimming its bond purchases at all, the markets may just rally.
indiatimes.com
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