US Fed seen trimming stimulus program

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WASHINGTON, D.C.: Steady economic gains, including a sharp fall in the unemployment rate, should stir the US Federal Reserve to begin trimming its stimulus program at its policy meeting on Tuesday and Wednesday.

But economists said that there is a chance the Fed will still hold off the long-awaited taper of its huge bond purchase program, which aims at holding down interest rates to spur investment and hiring.

With inflationary pressure absent, outgoing Fed Chairman Ben Bernanke and his successor-designate, Vice Chair Janet Yellen, could very well wait another month to be sure the economic data holds up. The Federal Open Market Committee (FOMC) holds its final meeting of the year on December 17 to 18, marking the first anniversary of the $85-billion a month QE3, the latest edition of the crisis-era “quantitative easing” operations.

Since Bernanke began talking about reducing the program in May, markets have expected the start of the taper, with bond yields and lending rates, especially mortgage rates, jumping more than one percentage point in anticipation.


Since then, FOMC meeting minutes show a reticence to take the first step, amid concern over Washington policy battles and mixed indicators on the economy’s health.

Tapering QE3 would signal the beginning of the end of the Fed’s five-year crisis stance, a major step toward the normalization of monetary policy, including, eventually, higher base interest rates.

But analysts think that move could be held off for Yellen to put her stamp on policy. The US Senate will almost certainly approve her nomination next week, after which she will take over on February 1. The Fed’s next two reviews will come on January 29 to 30 and then March 19 to 20.

“Policymakers will probably wait a little while longer in order to feel secure that these improvements are sustainable,” said IHS Global Insight in a report.

One reason for QE3 last year was the need to offset the drag on economic growth of looming tax increases and steep cuts in government spending that were to come into place from the beginning of 2013.

In addition, there was the turmoil of constant fights over raising the debt ceiling, including the 16-day government shutdown in October.

This time, however, the budget and debt brinksmanship appears to be out of the way. A Republican-Democrat deal on the budget over the next two years passed the House of Representatives on Thursday, and will likely pass the Senate next week.

Encouraging numbers
The economic numbers are increasingly supportive of ending QE3. In November, the unemployment rate sank unexpectedly sharply to 7 percent, a five-year low.

While some of the drop could be explained by reconciliation of distorted figures the previous two months, the bottom line is that the rate has steadily fallen: It was 8.5 percent at the end of 2011 and 7.8 percent at the end of last year.

Other data is also fairly good on industrial production, consumer spending, exports and investment. The Fed’s most recent regional survey found few weak points. Growth overall remains “modest to moderate.”

On the other hand, inflation remains so weak that some policy makers have fretted about deflation. The official consumer price index was rising 1 percent annually in last month’s read, well below the Fed’s target level of 2 percent.

And on Friday, the producer price report for November suggested more of the same: it was up a bare 0.7-percent year-on-year and core prices — excluding energy and food — were up just 1.3 percent.

“There remain no signs of price pressures anywhere in the system,” said Michael Montgomery, US economist at IHS Global Insight.

“The downward shove from malaise in Europe may be ending, but there is no upwards shove from their recovery yet,” he added.

John Silvia, chief economist at Wells Fargo, said that Yellen, more worried about employment, is more likely to take advantage of soft prices and keep QE3 spending in place to further boost the jobs market.

And when it comes, he added, the taper would be modest.

James Bullard, the head of the St. Louis branch of the Fed, gave a plausible argument recently for FOMC action without too much commitment.

“A small taper might recognize labor market improvement, while still providing the committee the opportunity to carefully monitor inflation during the first half of 2014,” he said.

“Should inflation not return toward target, the committee could pause tapering at subsequent meetings,” Bullard added.

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