Fed Likely To Stick To Low-rate Message This Week
In a speech in Ann Arbor, Mich., this month, Chairman Ben Bernanke said he thought too little progress had been made in reducing unemployment and signaled that the Fed's aggressive support programs should continue.
"There is still quite a ways to go," Bernanke said of the unemployment crisis. "There are too many people whose skills and talents are being wasted."
Still, some private economists think the Fed will decide to suspend its bond purchases in the second half of this year. They note that the minutes of the Fed's December meeting revealed a split: Some of the 12 voting members thought the bond purchases would be needed through 2013. Others felt the purchases should be slowed or stopped altogether before year's end.
On one point, economists agree: Once the Fed does decide to scale back its stimulative policies, it will signal its intent well before it actually does so. Policymakers will want to blunt the shocks that could reverberate through financial markets, which have been heavily influenced by the loose-credit policies the Fed has engineered for more than four years.Interest rates have sunk to record lows. And stock prices have risen as many investors have shifted money into the stock market in search of better returns. "Nothing will change at this meeting, but as time goes on, I think the Fed will begin laying the groundwork for changes," said Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University. Once the Fed does tighten its interest-rate policy, it will inevitably jolt the markets, however much it tries to ease the impact, predicted David Jones, chief economist at DMJ Economic Advisors. "The second the Fed gives a hint that they are in any way being less accommodative, we will see interest rates shoot higher and stock prices fall," Jones said.
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