Federal Reserve begins two-day meeting as stimulus taper looms

Speculation mounting that chairman Ben Bernanke is preparing to announce cuts on economic stimulus programme

The Federal Reserve began a two-day meeting Tuesday as speculation mounted that chairman Ben Bernanke is preparing to announce cut-backs on the US's $85bn-a-month economic stimulus programme.

Bernanke will hold a press conference Wednesday to discuss the Fed's plans. The event comes amid speculation that he will announce his resignation: Bernanke has made clear he will not seek a third term as chairman and Barack Obama is now assessing replacements.

The Fed's third round of bond buying, known as quantitative easing, was announced last September and has so far pumped about $800bn into the bond markets in an attempt to kick-start investment and keep interest rates down. In June, Bernanke announced some "tapering" of policy could begin later this year if the economy continued to improve.

The Federal Reserve's open markets committee (FOMC), however, is split on QE with some concerned about the unintended consequences of the massive programme. In previous FOMC meetings some members have made clear they want an early end to the programme.

On Monday, stock markets reacted positively to news that former Treasury secretary Larry Summers had withdrawn from the race to succeed Bernanke. Janet Yellen, the Fed's vice-chairman, is now seen as the most likely successor. Summers was seen as being more critical of QE while Yellen has backed Bernanke in his support of the programme on the FOMC.

Paul Dales, senior US economist at Capital Economics, said the Fed was likely to announce some tapering of QE. "It will be a close call but I think it's more likely than not," he said. "It will depend on whether the Fed believes the labour market has improved enough in the last months, and for the right reasons."

Last month the US unemployment rate dropped to 7.3%, down from 8.1% a year ago. But the pace of job recovery remains slow and part of the drop was due to people leaving the workforce. The labour force participation rate slumped to 63.2%, its worst reading in 35 years.

Dales said it was clear that some members of the committee were becoming increasingly alarmed by the scale of the QE programme. "They are not too sure what the costs are," he said. "Perhaps further asset bubbles or destabilizing the financial markets. They have never done before."

Bernanke has ducked questions about his future at previous press conferences. He will not hold another scheduled FOMC press conference until December. His term is due to expire at the end of January. Despite the tight timetable economists expect him once more to focus on economic policy rather than his future and the appointment of a successor.

Article Source : http://www.guardian.co.uk

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