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Continued: Financial world looks to Bernanke this week to clarify Fed's timetable on economic stimulus

  • Article by: MARTIN CRUTSINGER , AP Economics Writer
  • Last update: June 17, 2013 - 4:45 PM

Some think he could spell out the Fed's likely timetable for curtailing its bond purchases. The earliest the Fed is expected to announce a pullback is at its September meeting — and only then if unemployment has declined and the economy is growing faster than its current sluggish annual pace of around 2 percent.

Other analysts think the economy will not have recovered enough by September. They believe the earliest the Fed will reduce its stimulus is at its final meeting of the year in December. Until then, they think Bernanke will seek to reassure investors that the Fed will make sure the economy has strengthened before it acts.

Some in this camp say the economy will continue to be held back by a Social Security tax increase that kicked in in January and by federal spending cuts that began taking effect March 1.

"There is nothing in the underlying economy that would suggest the Fed needs to change policy any time soon," said Brian Bethune, an economics professor at Gordon College in Massachusetts. "There is considerably slower growth on the radar screen and absolutely no inflation to worry about."

Indeed, the Fed's preferred gauge of inflation tied to consumer spending rose just 0.7 percent in the 12 months that ended in April— far below the Fed's 2 percent target.

In addition to a statement announcing its policy stance and Bernanke's news conference, the Fed on Wednesday will update its economic forecasts, which it does four times a year. The forecasts will be scrutinized for any hints about the timing of future Fed action.

In its most recent forecasts in March, Fed officials predicted that the economy would grow as little as 2.3 percent this year — not enough to quickly drive down unemployment — or as high as 2.8 percent. It forecast that the unemployment rate would dip to between 7.3 percent and 7.5 percent by year's end.

If the Fed dims its outlook for growth and employment, investors would likely read that to mean the central bank will delay any scaling back of its stimulus. But if the Fed upgrades its forecasts, that could suggest that it's moving closer to reducing its bond purchases.

Some analysts think that in his news conference, Bernanke will want to signal to investors that the Fed is moving toward at least the start of a reduced pace of bond purchases in the second half of the year. Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University, suggested one possible approach: The Fed could reduce its $85 billion a month in purchases to about $60 billion in September, then to about $35 billion early next year, then stop the purchases altogether by spring.

Even when the Fed stops buying bonds, it's expected to maintain its current holdings, which would continue to exert downward pressure on long-term rates.

Whatever guidance Bernanke offers Wednesday could help steady markets for a key reason: It will reduce uncertainty.

Margie Patel, a portfolio manager at Wells Fargo Capital Management, thinks investors will remain calm even after the Fed slows its stimulus. She noted that the economy has been improving, however gradually.

"There's no sector you can look at that's extremely dependent on the low rates for growth, even housing," she said. "If rates went up modestly, housing is still more affordable than it has been in years."

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