Fed likely to reduce bond buying, pass policy milestone
By Alister Bull ,ReutersWASHINGTON -- The U.S. Federal Reserve is expected to begin its long retreat from ultra-easy monetary policy on Wednesday by announcing a small reduction in its bond buying, while stressing that interest rates will remain near zero for a long time to come.
September 19, 2013, 12:25 am TWN
Most economists expect the Fed to scale back its monthly purchases by a modest US$10 billion, taking them to US$75 billion and signaling the beginning of the end to an unprecedented episode of monetary expansion that has been felt worldwide.
The baby step would begin to provide a bookend of sorts to the central bank's response to the global financial crisis that reached fever pitch five years ago this week with the collapse of investment bank Lehman Brothers.
“It is an important milestone ... juxtaposed against five years ago, when the Fed began the huge expansion of its balance sheet,” said Carl Tannenbaum, chief economist at Northern Trust in Chicago. “This is going to be the first step, potentially, in a very, very long walk.”
The Fed will announce its decision in a statement following a two-day meeting at 2 p.m. (1800 GMT), and Fed Chairman Ben Bernanke will hold a news conference a half hour later. It is also set to release fresh quarterly economic and interest rate projections.
In slashing overnight rates to zero in late 2008, the Fed launched an extraordinarily bold campaign to shelter the U.S. economy. The effort included three rounds of bond purchases that more than tripled its balance sheet to around US$3.6 trillion.
The actions, unthinkable to many within the Fed prior to the crisis, sparked intense criticism from those who feared the measures would create an asset bubble or fuel inflation.
But the central bank's show of force was credited with saving the U.S. and world economies from a much worse fate.
With the U.S. economy now on a somewhat steady, if tepid, recovery path and unemployment falling, policymakers have said the time was drawing near to begin ratcheting back their bond buying with an eye toward ending the program around mid-2014.
While U.S. government bond yields and mortgage rates have shot higher in anticipation of less Fed support, the central bank will still be expanding its balance sheet for many more months as it tries to wean the economy and financial markets from its ever-expanding stimulus.