Seven of 10 economists surveyed by USA TODAY predict the Federal Reserve will begin scaling back its easy-money policies this year, with most of that group saying its initial move will come by early fall.
Fed Chairman Ben Bernanke may do little to dispel that belief after a two-day meeting of policymakers ends Wednesday, despite weeks of market turmoil since Bernanke suggested the stimulus might be dialed back in coming months.
But he is likely to ease financial market concerns that a reduction in stimulus is irreversible and signal an earlier increase in short-term interest rates, economists say.
USA TODAY's survey of 45 top economists last week revealed a dramatic shift since early May. Almost three-quarters of economists USA TODAY surveyed in May said the Fed will continue buying $85 billion a month in Treasury bonds and mortgage-backed securities until next year. The purchases are intended to hold down long-term interest rates and juice the economy, and the Fed has said they will continue until the job market improves substantially.
However, with job growth averaging a solid 190,000 a month this year, Bernanke told Congress on May 22 that the Fed "could in the next few meetings ... take a step down in the pace of our purchases" if the labor market continues to improve. His remarks have roiled stock markets and added fuel to a bond sell-off that has seen 10-year Treasury yields rise to about 2.1% from 1.6% in early May.
Barclays Capital economist Michael Gapen, a former top Fed staffer, says Bernanke is unlikely to retreat from his testimony at a news conference Wednesday afternoon. "If he tries to talk that down, the market will be really confused," Gapen says.
Still, JPMorgan economist Michael Feroli says Bernanke will put less emphasis on the timing of any reduction in purchases, noting that will depend on the labor market's health. "He will probably choose his words a little more carefully," he says.
And, Feroli says, Bernanke will likely stress that bond purchases could be reduced but then increased if the economy falters. Many analysts expect the economy and job market to stumble the next few months because of federal budget cuts and a payroll tax hike, which could delay any tapering of bond purchases.
Bernanke is also expected to clarify that dialing back Fed stimulus won't lead to an earlier increase in the Fed's fund rate. The Fed has said that benchmark short-term interest rate will remain near zero at least until unemployment falls to 6.5%. Yet after Bernanke's testimony, investors moved up their expected date of that rate increase to early 2015 from mid-2015, fed fund futures contracts show. Short-term rates rose as well.
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