June 17, 2013

World looks to Bernanke to clarify stimulus plans

By Martin Crutsinger / The Associated Press

(Continued from page 1)

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Federal Reserve Board Chairman Ben Bernanke testifies on Capitol Hill ibefore the Senate Budget Committee in this 2012 photo. The financial world looks to Bernanke to clarify the Fed's timetable on economic stimulus.

AP

Economists say Bernanke will seek to clarify the Fed's message Wednesday. Yet they're unsure what he'll say.

Some think he could spell out the Fed's likely timetable for curtailing its bond purchases. The earliest the Fed is expected to announce a pullback is at its September meeting — and only then if unemployment has declined and the economy is growing faster than its current sluggish annual pace of around 2 percent.

Other analysts think the economy will not have recovered enough by September. They believe the earliest the Fed will reduce its stimulus is at its final meeting of the year in December. Until then, they think Bernanke will seek to reassure investors that the Fed will make sure the economy has strengthened before it acts.

"The Fed has worked very hard to get stock prices and home prices rising to help the economy, and I don't think they want to back away from that in any way," said Mark Zandi, chief economist at Moody's Analytics. "I think Bernanke will deliver a strong message that the Fed is not going to taper until the job market is improving in a consistent way."

Some in this camp say the economy will continue to be held back by a Social Security tax increase that kicked in in January and by federal spending cuts that began taking effect March 1.

"There is nothing in the underlying economy that would suggest the Fed needs to change policy any time soon," said Brian Bethune, an economics professor at Gordon College in Massachusetts. "There is considerably slower growth on the radar screen and absolutely no inflation to worry about."

Indeed, the Fed's preferred gauge of inflation tied to consumer spending rose just 0.7 percent in the 12 months that ended in April— far below the Fed's 2 percent target.

Some think Bernanke will want to signal to investors on Wednesday that the Fed is moving toward at least the start of a reduced pace of bond purchases in the second half of the year. Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University, suggested one possible approach: The Fed could reduce its $85 billion a month in purchases to about $60 billion in September, then to about $35 billion early next year, then stop the purchases altogether by spring.

Even when the Fed stops buying bonds, it's expected to maintain its current holdings, which would continue to exert downward pressure on long-term rates.

Whatever guidance Bernanke offers Wednesday could help steady markets for a key reason: It will reduce uncertainty.

Margie Patel, a portfolio manager at Wells Fargo Capital Management, thinks investors will remain calm even after the Fed slows its stimulus. She noted that the economy has been improving, however gradually.

"There's no sector you can look at that's extremely dependent on the low rates for growth, even housing," she said. "If rates went up modestly, housing is still more affordable than it has been in years."

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