Fed Sparks A Debate: When To Reduce Stimulus?
Diane Swonk, chief economist at Mesirow Financial, noted that the Fed wants to see unemployment decline "because employment improves, not because the number of people looking for work falls."
The Fed has plenty of other reasons to delay any reduction in the bond purchases.
For one thing, inflation is under control. Those who want to see the Fed reduce its economic stimulus worry that super-low rates and aggressive bond purchases could ignite inflation and perhaps create dangerous asset bubbles.
But there's no inflation threat in sight. Inflation is running well below the Fed's 2 percent target. Consumer prices have risen just 1.5 percent over the past year. And there's little sign that that inflation is gaining any momentum. The Fed predicted Wednesday that inflation would stay at or below 2 percent through 2016.A destructive budget fight also looms in Washington. Unless Congress agrees to fund the government past Oct. 1, the government will shut down. Worse, the government will reach its borrowing limit next month. If Congress won't raise the limit, the government won't be able to pay all its bills. The risk of a shutdown or default would likely rattle financial markets and could scare businesses and consumers into spending less. The Fed doesn't want to reduce economic aid until it's sure the politicians don't wreck the economy. The upcoming budget battles "gave them the reason to hold off on tapering right now," says Greg McBride, senior financial analyst at Bankrate.com Investors are also nervous about any reduction in Fed stimulus, despite Bernanke's assurances that even reduced bond purchases would still pump significant cash into the economy and financial markets. Investors dumped bonds and drove up interest rates after the Fed started talking in May about cutting bond purchases. Since then, long-term mortgage rates have risen a full percentage point to the highest level in two years. Those rates could rise further if the Fed slowed its bond purchases.
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