Bernanke seen pressing on with stimulus amid debate on QE
Federal Reserve Chairman Ben S. Bernanke and his fellow policy makers will probably forge ahead with their unprecedented bond buying when they meet next week, even as they pick up a debate that began in December on when to end the purchases.
The job market has yet to show the "substantial" gains Bernanke said he wants to see before halting asset purchases. Unemployment has persisted at 7.8 percent or higher since January 2009 while Bernanke held the main interest rate near zero and expanded the Fed's assets to a record $2.97 trillion. Meanwhile, all 19 Federal Open Market Committee participants see no immediate threat from inflation, now at 1.4 percent.
The Fed chairman can count on the FOMC to endorse the current program to buy $45 billion in Treasury notes and $40 billion in mortgage bonds each month, said Nathan Sheets, Bernanke's top adviser on international economics from 2007 to 2011. Six Fed officials have indicated in interviews and speeches that the central bank probably won't pare its stimulus yet, and two district bank presidents who advocate record easing, Charles Evans of Chicago and Eric Rosengren of Boston, gained voting power this year in an annual FOMC rotation.
Fed officials in a Jan. 30 statement "will emphasize that they are committed to providing exceptional stimulus until the labor market shows more pronounced signs of recovery," said Sheets, who is New York-based global head of international economics at Citigroup Inc. "The chairman seems to have a firm grip on the FOMC and the overall trajectory of policy."
Bernanke, whose term ends next January, said last week the unemployment rate in December "is not an acceptable situation," especially when 39 percent of the jobless haven't worked for six months or more.
There are "too many people whose skills and talents are being wasted," he said at an appearance in Ann Arbor, Michigan. "We'll be assessing the impact of our actions on financial market conditions and looking to see how those link up to developments in labor markets and in the broader economy."
The FOMC during its two-day meeting next week will probably discuss when to curb its bond-buying program, Sheets said. Minutes from the December FOMC meeting revealing the debate and released on Jan. 3 pushed stocks lower and bond yields higher. The Standard & Poor's 500 Index fell 0.2 percent that day and yields on 10-year Treasuries rose 0.07 percentage point.
"Markets overreacted to the minutes," said Dean Maki, chief U.S. economist at Barclays Plc in New York. "Nothing in the minutes said the FOMC is going to be anything less than supportive of the economy in the coming months."
The S&P 500, the benchmark for U.S. equities, rose 0.2 percent yesterday to 1,494.81 in New York, while the yield on the 10-year Treasury note fell 0.02 percentage point to 1.82 percent. The yield has increased from 1.72 percent on Sept. 13, the day the Fed announced its third round of quantitative easing, while stocks have climbed 4.8 percent this year.
The FOMC will probably reduce its pace of purchases around mid-year "if the unemployment rate is making steady declines" and continue bond buying throughout 2013, Maki said.