WASHINGTON (AFP) – Federal Reserve policy makers face a tough challenge on Wednesday as they conclude a two-day meeting with a decision on whether to scale back their stimulus program.
The launch of the “taper” — reining in its $85 billion a month bond-buying program — has been expected since May, when Fed chairman Ben Bernanke said it was likely as long as the economy continues to grow steadily.
The Federal Open Market Committee, which Bernanke leads, went as far as to predict the whole “quantitative easing” program would be wound up by mid-2014.
At that time, the economy would be fairly strong and the jobless rate near 6.5 percent. So the Fed could start “normalizing” monetary policy — that is, begin raising interest rates off their near-zero levels, finally putting the 2008-09 Great Recession behind.
But economists say the details in economic data and a challenging policy environment should tell the FOMC to keep the stimulus in place, or not go further than a token stimulus cut.
For one, indicators suggest the economy may have slowed since the second quarter’s 2.5 percent pace, and that part of the cause could be cuts in government spending.
In addition, more spending cuts are scheduled. And the White House and Congress are on the edge of a tough fight over the coming year’s budget and raising the debt ceiling that could generate more uncertainty in the economy.
“If you think about the balance of risks, this is a bad time to be doing anything that looks like a tightening of monetary policy,” said economist Paul Krugman in the New York Times.
The expectation of a policy shift has already sent market interest rates higher, and the yield on the benchmark 10-year Treasury bond has nearly doubled in four months, from 1.6 percent to 3.0 percent.
That has been perhaps more than the FOMC expected in communicating its intentions. It has pushed up U.S. loan rates, with data suggesting that has already slowed consumer spending and home buying — potentially stifling the recovery in the broader housing sector.
That was borne out in fresh data Tuesday from the National Association of Home Builders, whose builder confidence index held steady in September after months of gains.