Fed Decision-Day Guide From QE Tapering Guidance to DissentsAki Ito
Here’s what to look for when the Federal Open Market Committee releases a statement at 2 p.m. tomorrow after a two-day meeting in Washington. Unlike last month, the policy-making panel will not release economic forecasts, and Chairman Ben S. Bernanke will not be briefing the press afterwards.
-- Possible clarification in the statement on the likely path of the Fed’s bond buying, currently $85 billion a month. Bernanke said in a news conference on June 19 that the central bank may begin reducing the pace of purchases “later this year” and may end the program about the middle of 2014, assuming the economy performs as forecast by the Fed. By the time the program ends, unemployment will be around 7 percent, Bernanke said. The rate was 7.6 percent in June.
“We are looking for the FOMC to formalize a version of the guidelines for tapering QE laid out by Chairman Ben Bernanke,” Julia Coronado, chief economist for North America at BNP Paribas in New York, wrote in a research note. The statement will probably say that the committee expects to begin trimming the purchases later this year; that the reduction will come in “measured steps” if the economy continues to improve and inflation rises closer to the Fed’s target; and that the program will end when unemployment is around 7 percent, she said.
-- An emphasis from the FOMC that it expects to pursue accommodative policy for the foreseeable future, even after the committee concludes its so-called quantitative easing program, according to Neal Soss and Dana Saporta, economists at Credit Suisse Group AG in New York. The FOMC has kept its benchmark interest rate near zero since December 2008.
-- No change in the pace of bond purchases. None of the 54 economists surveyed by Bloomberg July 18-22 expected the FOMC to begin paring asset purchases at the meeting ending tomorrow. Half predicted a dial-back of the program to $65 billion per month in September.
-- An acknowledgement that low inflation has been more persistent than expected, which would “would be seen as dovish, as would a more explicit commitment to defend their inflation target from below,” according to a research note from Bank of America Corp. in New York. The Fed’s preferred price gauge showed that inflation was at 1 percent in May, compared with the central bank’s 2 percent target.
-- Renewed dissents from St. Louis Fed President James Bullard and Kansas City’s Esther George, according to Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. Bullard has repeatedly voiced concerns about low inflation, while George has said the Fed’s record accommodation risks leading to financial imbalances.