World Looks To Bernanke To Clarify Stimulus Plans
In its most recent forecasts in March, Fed officials predicted that the economy would grow as little as 2.3 percent this year â¿¿ not enough to quickly drive down unemployment â¿¿ or as high as 2.8 percent. It forecast that the unemployment rate would dip to between 7.3 percent and 7.5 percent by year's end.
If the Fed dims its outlook for growth and employment, investors would likely read that to mean the central bank will delay any scaling back of its stimulus. But if the Fed upgrades its forecasts, that could suggest that it's moving closer to reducing its bond purchases.
Some analysts think that in his news conference, Bernanke will want to signal to investors 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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