WASHINGTON: Steady economic gains, including a sharp fall in the unemployment rate, should stir the US Federal Reserve to begin trimming its stimulus programme at its policy meeting tomorrow and Wednesday.
But economists say there is a chance the Fed will still hold off the long-awaited taper of its huge bond purchase programme, 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 17-18, marking the first anniversary of the $85bn 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 29-30 and then March 19-20. “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 Thursday, and will likely pass the Senate next week.
The economic numbers are increasingly supportive of ending QE3. In November the unemployment rate sank unexpectedly sharply to 7.0 percent, a five-year low.
AFP
