Share This Page

Jarring change by Fed unlikely

| Tuesday, Dec. 17, 2013, 7:15 p.m.

WASHINGTON — Is this week when the Federal Reserve finally slows its aggressive stimulus for the economy? Or does it want to await more evidence of a consistently improving economy?

It's a close call.

Most economists think the Fed will maintain the pace of its monthly bond purchases to keep long-term loan rates low to spur spending and growth.

The decision carries high stakes for individuals, businesses and global financial markets. A pullback in the Fed's bond buying likely would send long-term rates up and stock and bond prices down.

Many analysts think the Fed will signal that it expects to slow the pace of its bond purchases from $85 billion a month, perhaps early next year, if the economy strengthens further.

The Fed will announce its decision when its latest policy meeting ends on Wednesday, just before Chairman Ben Bernanke holds his final quarterly news conference. Bernanke will step down on Jan. 31 after eight years as chairman.

That the Fed is even considering slowing its stimulus is testament to the economy's improvement. Hiring has been robust for four straight months. Unemployment is at a five-year low of 7 percent. Factory output is up. Consumers are spending more at retailers. Auto sales haven't been better since the recession ended 4½ years ago.

What's more, the stock market is near all-time highs. Inflation remains below the Fed's target rate. And the House has passed a budget plan that seems likely to avert another government shutdown next year. The Senate is expected to follow suit.

“It really feels like the economy has finally hit escape velocity,” said Mark Zandi, chief economist at Moody's Analytics, citing a term Bernanke has used for an economy strong enough to propel growth and shrink unemployment without the Fed's extraordinary help.

Still, only one-fourth of more than three dozen economists surveyed last week by The Associated Press expect the Fed to scale back its bond purchases this week.

One complicating factor is the transition the Fed is undergoing as Bernanke enters his final weeks as chairman. Beginning in February, Bernanke will be succeeded by Janet Yellen, now the vice chair. The Senate is expected to confirm Yellen's nomination this week.

The economists surveyed by the AP think Yellen will be more “dovish” than Bernanke — that is, more likely to stress the need to reduce still-high unemployment than to worry about inflation that might arise from the Fed's policies.

Investors have been on edge about a pullback in the Fed's bond purchases since June, when Bernanke proposed a timetable for a slowdown. Bernanke said the Fed could start reducing its bond purchases before 2013 ends and stop the purchases altogether by mid-2014.

His remarks threw markets into turmoil. The Dow Jones industrial average plunged. Interest rates spiked.

Stock markets have since recovered, though the rate on the benchmark 10-year Treasury remains well above its level in early May, before Bernanke hinted of a pullback in bond buying. The higher rate reflects investors' anticipation of an eventual Fed slowdown.

The calmness among investors suggests that they've absorbed a point Bernanke has stressed repeatedly: that even after the Fed scales back its bond purchases, it will provide significant support for the economy. Fed officials have invoked the imagery of a driver easing up on a gas pedal without pressing the brakes.

In addition, the Fed plans to leave its key policy lever for short-term rates at a record low near zero, where it has been since December 2008. It's said it plans to leave its short-term rate ultra-low at least as long as unemployment remains above 6.5 percent and the outlook for inflation doesn't top 2.5 percent.

An unemployment rate of 6.5 percent wouldn't automatically trigger a rate increase, Bernanke has said. To stress that short-term rates will remain ultra-low, some Fed officials favor announcing an unemployment threshold of 6 percent before any rate increase would be considered.

TribLIVE commenting policy

You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.

We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.

While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.

We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers

We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.

We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.

We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.

We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.