Cutting back the Federal Reserve’s unprecedented monthly bond purchases is “firmly on the table” to get underway before a new chairman takes over in January, said Vincent Reinhart, chief U.S. economist for Morgan Stanley in New York.
“They really want to start the business of tapering,” Reinhart said today on the Bloomberg television’s “Street Smart” with Sara Eisen and Adam Johnson. “They’ve lost confidence in the instrument, they don’t think it sends an important signal.”
The Federal Open Market Committee will opt for tapering its $85 billion in monthly asset purchases at the Sept. 17-18 meeting, according to 65 percent of 48 respondents in an Aug. 9-13 Bloomberg survey. The median estimate called for purchases to be cut to $75 billion.
The pullback of quantitative easing will begin partly because “they want the process of unwinding the program in place before the next chairperson,” said Reinhart, former director of the Federal Reserve’s Division of Monetary Affairs.
President Barack Obama must decide who will replace Chairman Ben S. Bernanke when his term ends in January. Obama has said he is considering potential successors, including Lawrence Summers, Obama’s former top economic adviser, and Janet Yellen, the current Fed vice chairman.
Summers is the person the president is more comfortable with, Reinhart said.
Obama “Probably would prefer Larry Summers, the question is can it be done,” he said. “If you’re loaded up for loyalty and you want a fight in the Senate, that’s Larry Summers.”
A Bloomberg survey of 63 economists published Aug. 14 found that Yellen will probably be Obama’s pick to lead the central bank, with 65 percent picking her as the favorite. Twenty-five percent said the president will pick Summers to lead the bank.
Reinhart also said the U.S. economy’s biggest risk “is not domestic” as fiscal constraints have peaked and wealth improves.
“The biggest unknown is the rest of the world,” Reinhart said. “Look at emerging markets. They’ve got to absorb a significant renormalization in interest rates. That’s going to be a test in a lot of economies.”
India’s rupee plummeted past 64 per dollar for the first time today on concern foreign outflows will accelerate as the Federal Reserve prepares to trim stimulus. Overseas funds have pulled about $12 billion from local debt and equities since May 22 when Bernanke first signaled the central bank may pare its bond-buying program.