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July 23, 2017

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Fed seen on taper track as Bernanke bows out

WASHINGTON--The Federal Reserve is expected to keep on the stimulus tapering track Wednesday, with most analysts predicting another "modest" US$10 billion cut in monthly asset purchases.

Fed Chairman Ben Bernanke heads up the final monetary policy meeting of his eight-year tenure at the helm of the U.S. central bank with Janet Yellen, his close policy ally and current vice chair, due to succeed him on Feb.y 1.

The two-day meeting of the Federal Open Market Committee that opens Tuesday comes amid signs of underlying momentum in the U.S. economy, despite a dismal December jobs report that raised concerns about the outlook.

The last time the FOMC met, most policy makers were confident that the labor market would continue to improve even if they began to reduce The Fed's massive monetary stimulus, according to the minutes of the Dec. 17-18 meeting.

The FOMC voted then 9-1 to "modestly reduce" asset purchases by US$10 billion to US$75 billion a month, beginning January. The Fed said it would continue to monitor economic and financial conditions in gauging the pace of its taper.

The central bank assured that its "sizable and still-increasing holdings" should keep downward pressure on longer-term interest rates and, in turn, promote a stronger economic recovery.

Recent data including the central bank's upbeat Beige Book survey show the U.S. economy grew at a "moderate" pace across most regions at the end of 2013.

Hiring in most areas was slow but steady, "with few instances of rapid growth but very few reports of staff cuts or plant closings," the report said.

The housing market continues to rebound from the 2006 crash, although the pace slowed somewhat in the latter part of the year after mortgage interest rates jumped on the Fed's taper signal in May. Individuals have seen their net assets climb, in part due to sharp equities gains supported by the Fed's easy-money policy.

A broad range of analysts concluded that the Fed would taper again by another US$10 billion this week and wind down the quantitative-easing program by year-end.

"There is little reason to believe that the Committee's economic outlook has materially changed over the past month despite the recent declines in risk assets and the disappointing December jobs report, which policy makers are likely to attribute to adverse weather," Deutsche Bank analysts said in a research note.

"The markets are fully expecting the FOMC to announce another US$10 billion tapering at their upcoming deliberations," said Steven Ricchiuto, chief economist at Mizuho Securities.

"The ability of the incoming data to alter the course of policy has been diminished by the broad based market expectation that the FOMC will extend the tapering," Ricchiuto said.

Barclays analysts said the market probably would not react much to a new taper cut that is so widely baked into expectations.

"Given the strengthening of activity data since the December FOMC, we expect the Fed to upgrade its assessment of the economy (both overall and for the housing sector)," they said.

The global market sell-off late last week amid concerns about emerging-market economies, which are complaining that the Fed's taper is causing volatility that is hurting their growth potential, was unlikely to dissuade the Fed from halting the process, said Ed Yardeni of Yardeni Research.

"Last week's turmoil might make Fed officials realize that their ultra-easy monetary policy has inflated yet another speculative bubble, this time in emerging markets. Taking the air out of it might be wiser than continuing to inflate it."

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