Fed seen trimming bond buys, could offer vague rate clues

WASHINGTON Wed Jul 30, 2014 10:49am IST

U.S. Federal Reserve Chair Janet Yellen testifies before the Senate Banking Committee on Capitol Hill in Washington July 15, 2014. REUTERS/Kevin Lamarque/Files

U.S. Federal Reserve Chair Janet Yellen testifies before the Senate Banking Committee on Capitol Hill in Washington July 15, 2014.

Credit: Reuters/Kevin Lamarque/Files

Related Topics

WASHINGTON (Reuters) - The U.S. Federal Reserve on Wednesday looks certain to press forward with its plan to wind down its bond-buying stimulus, and could offer some vague clues on how much nearer it might be to finally raising interest rates.

The central bank is widely expected to cut its monthly asset purchases to $25 billion from $35 billion, which would leave it on course to shutter the program this fall.

With little drama expected from the decision, and no fresh economic projections and no news conference to guide investors, financial markets will be left to scour the Fed's announcement for any hint on whether officials are growing more anxious to start to reverse their monetary accommodation.

The Fed has kept overnight interest rates near zero since December 2008 and has more than quadrupled its balance sheet to $4.4 trillion through a series of bond purchase programs.

However, with unemployment dropping and inflation firming, the Fed could suggest that the days of this monetary largesse are increasingly numbered. A report on Wednesday is expected to show the U.S. economy grew at a healthy 3 percent annual clip in the second quarter.

"It is possible that the Fed will begin to alter its view on how much slack remains in the labor market," Paul Dales, of Capital Economics, said in a research note.

After its last meeting six weeks ago, the Fed said unemployment "remains elevated." Since then, the jobless rate has fallen to a near six-year low of 6.1 percent.

JPMorgan economist Michael Feroli said in a research note that the central bank could modify the language to say "somewhat elevated." Such a change would allow the Fed "a more gradual pivot in communications toward recognizing they are making progress toward their mandate," he said.

To a good degree, the health of the labor market holds the key to the Fed's decision on rates.

Fed Chair Janet Yellen believes there is more slack in the jobs market than the unemployment rate alone would suggest, but she warned earlier this month that a rate hike could come "sooner and be more rapid than currently envisioned" if labor markets continue to improve more quickly than anticipated.

After a stronger-than-expected reading on employment early this month, the median forecast of economists polled by Reuters put the first increase in rates in the second quarter of next year. Previously, it had been the third.

The forecast is in line with the prediction offered by interest-rate futures, which imply an increase in June 2015.

While less likely, officials could also acknowledge the modest uptick in U.S. prices, which has put inflation closer to the central bank's 2 percent target.

But economists expect the Fed to hold fast to its guidance that a "considerable time" will elapse between the end of its bond buying and its first rate hike.

(Reporting by Michael Flaherty; Editing by Andrea Ricci)

FILED UNDER:

Religion and Politics

REUTERS SHOWCASE

Fund Raising

Fund Raising

Flipkart raises $700 million in fresh funding.   Full Article 

Reforms Push

Reforms Push

Modi may order insurance, coal reforms if vote delayed - officials.  Full Article 

Reuters Exclusive

Reuters Exclusive

India looks to sway Americans with nuclear power insurance plan  Full Article 

To Boost Growth

To Boost Growth

Crank up public spending to revive growth - chief economic adviser.   Full Article 

Bold Steps

Bold Steps

SpiceJet rescue plan marks bold bet on Indian aviation recovery.   Full Article 

New Airline

New Airline

Tata, Singapore Air venture Vistara to take off on Jan 9.  Full Article 

Online Sales

Online Sales

Knock knock. Who's there? Amazon's best-selling holiday author.  Full Article 

Hacking Attack

Hacking Attack

N.Korea says did not hack Sony, wants joint probe with U.S.  Full Article 

Reuters Poll

Reuters Poll

BSE Sensex to hit 32,980 by December 2015  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage