September 17, 2013

The Fed grapples with uncertainty

As do investors waiting for clarity on bond-buying and who will fill vacancies.

The Associated Press

WASHINGTON - The Federal Reserve is being engulfed by the one thing it tries to prevent: uncertainty.

Will the Fed take its first step Wednesday toward reducing the extraordinary stimulus it's given the U.S. economy? Will its eventual pullback jolt the financial markets? Who will fill several expected vacancies on the Fed's policy board next year?

And with Lawrence Summers' withdrawal from consideration, who will lead the Fed once Ben Bernanke's term expires in January, ending one of the most tumultuous chapters in the Fed's 100-year history?

Uncertainty tends to rattle investors. Starting this week, the Fed may begin to supply the answers the financial markets are looking for.

Here's a look at the uncertainties the central bank faces:

TO TAPER OR NOT

Though hiring and economic growth remain soft, the Fed is widely expected this week to slow the pace of its bond purchases. Its purchases of Treasury and mortgage bonds have been designed to keep long-term loan rates low to get people to borrow and spend and invest in the stock market.

Most economists expect the Fed's initial move to be small -- a reduction in monthly purchases from $85 billion to $75 billion.

One reason: The Fed for months has been preparing markets for such a move. Fed officials wouldn't likely want to raise further uncertainty by failing to meet the very expectations they had raised.

Another factor: Some Fed officials don't think the bond purchases are doing much good anymore.

MARKET REACTION

Investors' response to a pullback in purchases is expected to be mild if the Fed announces a reduction of only around $10 billion a month. That's especially true if it balances its action by underscoring its commitment to keep short-term interest rates low well into the future.

The Fed has kept its benchmark for short-term rates at a record low near zero since December 2008. And it has said it expects to keep it there at least until the unemployment rate falls to 6.5 percent -- as long as the inflation outlook remains mild.

The unemployment rate is now 7.3 percent. Many economists do not expect it to reach 6.5 percent until late 2014 or early 2015.

To stress its commitment to keep short-term rates low as long as necessary, the Fed may tweak the language in the statement it will issue Wednesday to give investors more assurance that short-term rates will remain low for many more months.

FED COMMITTEE VACANCIES

Bernanke's chair is one of several that will need to be filled in coming months. In fact, the Fed's policy panel will have only 10 voting members at this week's meeting instead of the normal 12. One board member, Elizabeth Duke, left in August. Another, Sarah Bloom Raskin, has been nominated by Obama for the No. 2 job at Treasury and won't take part in the meeting.

The term of a third board member, Jerome Powell, expires in January. And a fourth, Jeremy Stein, is deciding whether to remain at the Fed next year.

The many vacancies are sure to raise questions about the Fed's future course of policy.

AFTER BERNANKE

Bernanke's second four-year term as chairman expires Jan. 31, and he's made clear he isn't interested in another term. The two leading candidates to succeed him had been former Treasury Secretary Lawrence Summers and current Fed Vice Chair Janet Yellen.

But in a surprise Sunday, Summers removes himself from consideration for the job. Financial markets rallied Monday. Many investors had feared that if Obama chose Summers, who was thought to be his first choice, it could lead to a protracted Senate confirmation battle and perhaps raise doubts about the Fed's commitment to low rates.

About one-third of Senate Democrats had written to Obama, urging him to pick Yellen, the highly respected No. 2 official at the Fed. She is seen as likely to get the nomination now.

 

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