Economists throughout the Nation are waiting with rapt attention to see if this will be the week that Federal Reserve officials lay out a clear exit strategy for its long-running zero interest rate, cheap money policy of quantitative easing.
As the Federal Open Market Committee meeting planned for Wednesday nears, the consensus appears to be that investors can expect more explanation than action in the Fed’s upcoming meeting. Disagreements remain about how far off an actual change in policy could be.
In a blog post published on The Wall Street Journal website, one economist suggests that the FOMC will use the meeting to encourage investors to ready themselves for a coming change in Fed policy.
A wide range of indicators suggest that investors are starting to think the Fed might start raising short-term interest rates — now near zero — sooner than previously thought. Until recently many market indicators suggested investors expected the first rate increases in mid-2015, but now these indicators indicate investors think it could be sooner…
Since last December the Fed has been promising to keep short-term interest rates near zero until the jobless rate reaches 6.5%, as long as inflation doesn’t take off. Most forecasters don’t see the jobless rate reaching that threshold until mid-2015.
At the same time, however, the Fed is talking about pulling back on its $85 billion-per-month bond-buying program. The chatter about pulling back the bond program has pushed up a wide range of interest rates and appears to have investors second-guessing the Fed’s broader commitment to keeping rates low.
CNN predicts, however, that the Fed will hold off on any real change in monetary policy until late in the year, based on a survey of economists and economic strategists:
Nearly two-thirds of the 39 people we surveyed said they don’t think the Fed will slow its monthly asset purchases until at least December. Some even noted that the so-called "tapering" may not begin until 2014.
"Tapering talk seems premature," said Dorsey Farr, partner with the investment firm French Wolf & Farr.
The rest of the economists and strategists thought the slowdown process would begin at either the September or October meetings.
Nobody predicted that the Fed will make a change at its upcoming meeting, but Fed watchers are hoping for hints from Bernanke, who will speak at a press conference Wednesday afternoon.
The disquiet over what the Fed will announce on Wednesday has had a clear economic impact on the markets, on display on Friday as Wall Street slumped and trading of the dollar remained sluggish.