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A guide to understanding Fed’s actions Wednesday
WASHINGTON (AP) — When the Federal Reserve ends a policy meeting Wednesday, many investors expect it to announce a shift in course. What they don’t want are any surprises.
Pretty much everyone expects the Fed to take its first step toward slowing the economic stimulus it’s supplied since the financial crisis and the Great Recession swept through the economy five years ago.
Yet it’s also assumed the Fed will do so gingerly: with a small cut in its monthly Treasury and mortgage bond purchases — from $85 billion to perhaps $75 billion. Those purchases have helped keep long-term loan rates ultra-low to encourage borrowing and spending.
The Fed is also expected to stress that while it’s slowing its bond purchases, it plans no change anytime soon in its benchmark short-term rate. It’s kept that rate at a record low near zero since 2008. Investors will be watching for anything the Fed says about this rate, which affects rates on countless business and consumer loans.
Here’s what to look for from each of four key events Wednesday: a statement the Fed will issue when its two-day meeting ends; the Fed’s updated economic outlook; Chairman Ben Bernanke’s news conference; and the reaction of investors:
This is where the Fed would announce its first slowdown in bond purchases. Many economists expect the cut to come entirely from the Fed’s $45 billion a month in Treasury bond purchases. That would leave untouched its $40 billion a month in mortgage bond purchases.
The reasoning: The mortgage bond buying is intended to keep downward pressure on mortgage rates. The Fed likely doesn’t want to diminish its support for the housing market, whose gradual but steady comeback has been a pillar for the U.S. economic recovery.
The statement is also where the Fed could strengthen its commitment to keep its key short-term rate at a record low. In December, the Fed began saying it expects to keep this rate near zero at least until unemployment falls to 6.5 percent — as long as the inflation outlook remains mild. Unemployment is now 7.3 percent. And in the past 12 months, consumer prices are up 1.5 percent, below the Fed’s 2 percent inflation target.
The Fed could stress anew that 6.5 percent unemployment is merely a threshold, not a trigger, for any rate increase. Which means it might choose to keep the benchmark rate at a record low for an extended period even after unemployment has dipped below 6.5 percent.
That’s especially true if unemployment is dropping mainly because more people have stopped looking for work, rather than because employers are hiring lots of people. The government doesn’t count people as unemployed once they stop looking for a job.
This is one of four meetings each year when the Fed updates its economic outlook, based on individual forecasts of board members and regional bank presidents. It’s likely to downgrade its outlook as it takes account of reality: The U.S. economy hasn’t grown as fast this year as the Fed had expected.
In their previous forecast three months ago, Fed officials predicted that the economy would grow between 2.3 percent and 2.6 this year and between 3 percent and 3.5 percent next year. Most economists think the economy will have grown 2 percent — at best — this year and roughly 2.6 percent next year.
The Fed will update its forecasts for unemployment and inflation, too.
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