Fed Meeting Could Lead To Stimulus Reduction

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Many economic analysts expect the Federal Reserve to announce the first reduction in its stimulus program on Wednesday. The Fed has been pumping money into the financial system by purchasing U.S. government bonds and mortgage-backed-securities.


And we are following other stories this week, including possible action by the Federal Reserve. Many analysts expect the Fed to announce the first reduction in its massive intervention in the economy, $85 billion per month, a decision that may come at the end of a two-day meeting. Here's NPR's John Ydstie.

JOHN YDSTIE, BYLINE: A number of surveys show at least half of the economists questioned believed policymakers will decide to reduce the level of stimulus at this meeting. John Silvia, chief economist for Wells Fargo, predicts the Fed will dial back its monthly injection by $10 billion.

JOHN SILVIA: It's a modest amount. I think it's enough that everybody can sort of agree on without really upsetting either side. Some people want to be more aggressive, some less. So I think they can get a unanimous vote on the 10 billion.

YDSTIE: The Fed has been pumping money into the financial system by purchasing U.S. government bonds and mortgage-backed securities. Silvia thinks policymakers will decide to start their so-called taper by reducing their purchases of government bonds, but will continue their current level of mortgage-backed securities purchases to avoid too much negative impact on the housing market. Silvia says he believes the economy is healthy enough to absorb the pullback without much problem.

SILVIA: I think we are generating enough jobs. The economy is moving along. The consumer's moving along. Auto sales have been pretty strong. Housing's improving. We can go ahead and pretty much, you know, eliminate all of QE3 by middle of 2014. We'll still have decent economic rev.

YDSTIE: But economist Dean Baker thinks the Fed will late a bit longer.

DEAN BAKER: Because of the weakness of the jobs reports the last few months, my guess is that they're going to put that off probably at least till December.

YDSTIE: Baker is co-director of the Center for Economic and Policy Research. As he points out, while job growth has been steady, in the past two months, it's averaged just 136,000. That's far below the number needed to bring down the unemployment rate rapidly.

BAKER: If you have a weak economy, no reason to fear inflation, why do anything to make it worse? So, I can't say, you know, if rates were to go up 10 to 20 basis points, that's a horrible thing, but it is going in the wrong direction. So it's just hard for me to see why the Fed would want to do that.

YDSTIE: Baker argues that if Fed policymakers do begin tapering this week, it would look like they're not paying attention to the data, and Chairman Bernanke has promised the decision to pull back stimulus will be data-driven. Part of the challenge for the Fed is that the data have been mixed with a weak job market, but strength in things like auto sales and housing. Neither Baker nor Silvia believes there will be a big response in the financial markets if the Fed does begin pulling back at this meeting. As Baker points out, both long-term interest rates and mortgage rates already have risen about one full percentage point just in response to the Fed's conversation about dialing back.

BAKER: So we already saw probably the biggest effect from the tapering. So, I have to say, whether they taper or not, at this point, it probably wouldn't make that much difference.

YDSTIE: And, John Silvia says, Larry Summers' decision to withdraw his name from consideration to succeed Ben Bernanke has steadied the markets. That's because it avoids an unsettling fight in Congress and makes a change in Fed policy less likely. John Ydstie, NPR News, Washington.


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