Fed Decision Day Guide From Tapering QE to Employment Thresholds

Dec. 18 (Bloomberg) -- Ellen Zentner, senior economist at Morgan Stanley, discusses preparing for Fed tapering and today’s FOMC decision on Bloomberg Television’s “Bloomberg Surveillance.”

Here’s what to look for when the Federal Open Market Committee releases its statement today at 2 p.m. after a two-day meeting in Washington. The panel will also provide new economic forecasts, and Federal Reserve Chairman Ben S. Bernanke will hold a news conference at 2:30 p.m.

-- Taper on tap? Economists are divided over whether the Fed will decide today to reduce its $85 billion monthly pace of bond purchases, with some saying that recent economic data is strong enough to warrant a move, and others that policy makers need to see more evidence that growth is durable.

-- “There is little reason for the Fed to delay tapering,” Joseph Lavorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, said yesterday in a note to clients. He cited better-than-expected employment data for October and November and “second-half output poised to average over 3 percent.”

-- Guy Berger, an economist at RBS Securities Inc. in Stamford, Connecticut, says March is a more likely date. “There’s no doubt that the doves feel more comfortable with tapering than they did three months ago, but certainly not enough that it makes you think tapering is imminent,” he said in an interview, referring to policy makers who favor pressing on with accommodation.

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A police officer stands the Marriner S. Eccles Federal Reserve building in Washington, D.C.

-- Any reduction today in monthly bond buying would probably be “gentle,” shaving as little as $5 billion from monthly purchases, according to Ward McCarthy, chief financial economist in New York at Jefferies LLC.

Policy Package

The Fed Approaches a Taper on Tiptoe

-- Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., puts the odds of tapering today at 60 percent. When the Fed does taper, it will offer a package of policies, which may include a change in how much banks are paid on excess reserves, thresholds for changing programs and forward guidance on policy, El-Erian said yesterday an in interview with Betty Liu and Cory Johnson on Bloomberg Television’s “In the Loop.”

-- Guidance counselors: The FOMC may accompany tapering with a change in forward guidance on the main interest rate, according to Lavorgna. The committee currently says it will keep the rate low as long as unemployment is above 6.5 percent and inflation doesn’t exceed 2.5 percent. Officials may reduce the jobless rate threshold to 6 percent or 5.5 percent, according to Lavorgna.

-- A couple of FOMC members at the Oct. 29-30 policy meeting supported reducing the unemployment threshold, while others said such a move may raise concerns about the Fed’s commitment to the thresholds, according to minutes of their meeting.

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Federal Reserve Bank Chairman Ben Bernanke takes questions during the National Economists Club Annual Dinner on Nov. 19, 2013 in Washington, DC. Close

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Federal Reserve Bank Chairman Ben Bernanke takes questions during the National Economists Club Annual Dinner on Nov. 19, 2013 in Washington, DC.

Evans’s View

-- Chicago Fed President Charles Evans, a supporter of record stimulus and a voter on policy this year, said last month he favors a 5.5 percent threshold. Several FOMC participants said at the October meeting it “could be more helpful” to better explain their intentions for the federal funds rate after the jobless rate falls to 6.5 percent, the minutes said.

-- Warming trend: The FOMC may provide more optimistic economic forecasts, predicting faster growth and a quicker decline in the unemployment rate for 2014, according to Eric Green, global head of foreign exchange, rates and commodities at TD Securities USA LLC in New York. Green predicts the Fed will forecast a 2.9 percent to 3.3 percent expansion, and 6.3 percent to 6.7 percent joblessness for next year.

-- Valedictory: Bernanke during his press conference will probably affirm his view that stimulus will stay high after the FOMC decides to start reducing bond buying, said Thomas Costerg, economist with Standard Chartered Plc in New York.

Hammering Message

-- “Bernanke has been downplaying the thresholds for some time, saying that there could be some time” between the end of asset purchases and the first interest rate increase, Costerg said in an interview. “We think he will repeat that and really hammer the message that the upcoming tapering is not tightening.”

-- Bernanke will also probably deliver one “final, impassioned defense of unconventional monetary policy and present a strong case for aggressive easing to continue,” Michael Hanson, U.S. senior economist at Bank of America Corp. in New York, said in a research note.

-- The Fed chairman’s term ends Jan. 31. Vice Chairman Janet Yellen, nominated by President Barack Obama to succeed Bernanke, is awaiting a confirmation vote by the Senate.

To contact the reporter on this story: Aki Ito in San Francisco at aito16@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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