|Financial markets tune in for clues to Fed tapering timeline after two-day meeting
A lot can change in six weeks.
When the Federal Reserve last met in mid-September, almost everyone expected monetary policy makers to start reducing the stimulus.
It didn't. The Fed pulled a surprise by deciding not to slow its US$85 billion-a-month in Treasury and mortgage bond purchases.
And now? After a 16-day partial government shutdown and a batch of tepid economic data, no one thinks the Fed will reduce its stimulus when it meets Tuesday and Wednesday. Many analysts now predict the Fed will maintain the pace of its bond purchases into next year, AP reports.
Blame the uncertainty surrounding Congress' budget fight and renewed questions about the economy's health.
“I think March is now the earliest that any reduction in bond purchases will happen,'' said Diane Swonk, chief economist at Mesirow Financial.
By then, Fed members expect to have seen several months of stronger job growth. They also expect Congress to have resolved its budget impasse.
If the Fed does start slowing its stimulus in March, it will have left its policy unchanged not just this week but also at its next meeting in December and at its subsequent meeting in late January. The delay would signal a dimmer economic outlook.
The January meeting will be the last for Chairman Ben Bernanke, who is stepping down after eight years. US President Barack Obama has chosen Vice Chair Janet Yellen to succeed Bernanke.
Assuming that Yellen is confirmed by the Senate, her first meeting as chairman will be in March. Many economists think no major policy changes will occur before a new chairman takes over.
Congress' budget fight has clouded the Fed's timetable. Though the government reopened October 17 and a threatened default on its debt was averted, Congress adopted only temporary fixes. More deadlines and possible economic disruptions lie ahead.
A House-Senate conference committee is working toward a budget accord. But wide differences separate Democrats and Republicans on spending and taxes. Without a deal by January 15, another shutdown is possible. Congress must also raise the government's debt ceiling after Feb. 7. If not, a market-rattling default will remain a threat.
The standoff has led economists to trim their forecasts for economic growth in the October-December quarter. US employers added just 148,000 jobs in September, a steep slowdown from August. And temporary layoffs during the shutdown are expected to depress October's job gain.
Given the uncertainties, analysts think the Fed will be cautious about paring its economic support.
In explaining its decision to maintain the pace of its purchases, the Fed expressed concern in September that higher rates, if sustained, could slow any improvement in the job market and the economy.
Given the panic among investors when Bernanke raised the prospect that the Fed would slow its bond purchases, analysts think any pullback will be very gradual. That's especially true if a pullback starts in March or later, when Yellen would be chairman and considering her first major policy move.
“The one thing Janet Yellen will not want to do is start her term by making a mistake,'' said Brian Bethune, an economics professor at Westmont College in Santa Barbara, California. “She will be extremely cautious and will try to signal that the Fed is starting to back off its bond purchases without causing the kinds of effects we saw in the summer.''