Monday, April 21, 2014   

Bernanke prepares to wind up
(12-18 18:09)

Investors are waiting to see whether one of Ben Bernanke's final acts as chairman of the US Federal Reserve will be to announce a pullback in bond purchases.
It's a close call.
But most economists think the Fed it will announce that it is maintaining its pace of US$85 billion a month in bond purchases despite a drop in unemployment to 7 percent and other improving economic data, AP reports.
One factor in the Fed's hesitance to reduce its stimulus is that inflation remains historically low. The Fed's optimal rate is 2 percent. For the 12 months ending in October, consumer inflation as measured by the Fed's preferred index is just 0.7 percent, well below its target. The Fed is as concerned about under-shooting the inflation target as over-shooting it. Both are seen as threats to the economy.
Bernanke’s second four-year term as chairman ends January 31, when Vice Chair Janet Yellen will likely succeed him. The Senate is expected to approve Yellen's nomination this week.
Most analysts think the Fed will start trimming its bond purchases at one of its next two meetings, either in January or March.
The decision carries high stakes for individuals, businesses and global financial markets. A pullback in the bond buying would likely send long-term rates up and stock and bond prices down.
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.
What's more, the stock market is near all-time highs. And the US House of Representatives 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.
Some economists think the Fed may decide to leave its policy unchanged this month just because Bernanke and other officials have not sent a clear signal of their intentions.
“Reducing bond purchases is going to happen at some point, but I don't think they have done enough explaining yet to prepare the markets for the move,'' said Diane Swonk, chief economist at Mesirow Financial.
Once the Fed does slow its bond purchases, many economists think it will start by reducing its monthly pace by just US$10 billion to US$75 billion.
Other economists think the Fed might decide not to trim its bond purchases until March _ the first meeting with Yellen in charge.
“I think they will wait until March when they have a new team in place,'' said Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University.

   
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