Fed likely to offer few clues on rate policies
- Article by: MARTIN CRUTSINGER
- AP Economics Writer
- July 31, 2013 - 5:25 AM
WASHINGTON — Chairman Ben Bernanke rattled markets last month when he said the Federal Reserve might slow its bond purchases later this year if the economy strengthens.
Economists expect the Fed will take a different approach Wednesday when it concludes its two-day policy meeting: Most expect policymakers will offer no major signals on interest-rate policies while stressing that any future changes hinge on the economy's health, not a set timetable.
"I would be surprised if they did anything to change policy at this meeting," said David Wyss, a former Fed staff economist and now an economics professor at Brown University. "I don't see anything to be gained by announcing something now rather than waiting to see how the economy performs."
Financial markets have been pivoting for months on speculation that the Fed will or won't soon slow its $85-billion-a-month in Treasury and mortgage bond purchases. Those purchases have led more consumers and businesses to borrow, fueled a stock rally and supported an economy slowed by tax increases and federal spending cuts.
The Fed might choose to clarify a separate issue: When it may raise its key short-term rate. The Fed has kept that rate near zero since 2008. It's said it plans to keep it there at least as long as unemployment remains above 6.5 percent and the inflation outlook below 2.5 percent.
Unemployment is now 7.6 percent; the inflation rate is roughly 1 percent.
Bernanke has stressed that the Fed could decide to keep its short-term rate ultra-low even after unemployment reaches 6.5 percent. Testifying to Congress this month, Bernanke noted that a key reason unemployment has declined is that many Americans have stopped looking for jobs. When people stop looking for work, they're no longer counted as unemployed.
If that trend continues, Bernanke said that lower unemployment could mask a still-weak job market and that the Fed might feel short-term rates should stay at record lows.
In the statement the Fed will issue when its two-day meeting ends Wednesday, it could specify an unemployment rate below 6.5 percent that would be needed before it might raise its benchmark short-term rate. It might also say that it won't raise that rate if inflation remains below a specific level.
On Wednesday, the government will report how fast the economy grew in the April-June quarter. Most economists predict an annual rate of barely 1 percent — far too weak to quickly reduce unemployment. Most think the growth is picking up in the second half of the year on the strength of a resurgent housing market, stronger auto sales, steady job gains and higher pay.
Some economists think the Fed will be mindful that the Dow Jones industrial average sank more than 500 points in two days after it met in June and Bernanke said the Fed would likely slow its bond-buying this year and end it next year because the economy was improving.
"The Fed is going to try to calm things down," said Brian Bethune, an economics professor at Gordon College, in Wenham, Mass.
Last month, in what was likely his last economic report to Congress, Bernanke said that even after the Fed has begun slowing its bond purchases, its policymaking will keep lending costs down. Besides keeping its short-term rate low, Bernanke stressed that the Fed will maintain its vast investment portfolio — which exceeds $3.4 trillion —to help keep long-term borrowing costs down.
Some economists still think the Fed will start trimming its bond purchases at its Sept. 17-18 meeting. Unlike this week's meeting, the September meeting will be followed by a news conference in which Bernanke could explain the actions.
Diane Swonk, chief economist at Mesirow Financial, said she believes September is a likely time for the Fed to scale back its bond buying. Yet she doubted it will do anything this week to signal that possibility.
"The less said right now, the better" for financial markets, Swonk said.
David Jones, chief economist at DMJ Advisors, said he still thinks the Fed will start trimming its bond purchases gradually starting in September. But he thinks that date could slip if the economy doesn't strengthen over the next two months. Other economists think the Fed may prefer to wait until after September to trim its purchases to make sure the economy is sustaining its gains.
The Fed's moves to reduce its bond purchases will likely occur just as it will be managing a transition to a new leader. Bernanke is widely expected to step down when his second four-year term as chairman ends Jan. 31.
Vice Chair Janet Yellen is viewed as a leading candidate to replace Bernanke, though former Treasury Secretary Lawrence Summers and others have also been mentioned.
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