For the second time in less than a decade, the Federal Reserve is getting ready to launch a thorny debate over how and when to sunset a massive asset-purchase program that helped cushion an economy battered by crisis but left it with a mountain of bonds that may linger on its balance sheet for years to come.
Officials’ opening discussion about how and when to taper the U.S. central bank’s $120 billion in monthly bond purchases looks set to occur at this week’s two-day policy meeting and will take place against a dramatically different backdrop than the last time around, when they were more skittish about owning such a substantial slice of the bond market.
“I think the discussion will start” at the Fed’s policy meeting on Tuesday and Wednesday, said Robin Brooks, chief economist at the Institute of International Finance. “I think it will start very, very cautiously,” he added, and Fed Chair Jerome Powell won’t be in any rush to conclude it.
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Even so, policymakers will want to start talking through what benchmarks they’d want the economy to meet before trimming the asset purchase program, Daco said, including measures of labor force participation and employment levels in addition to the unemployment rate, now at 5.8%.
In 2013, Fed policymakers aimed to complete the taper by the time unemployment had dropped to 7%.
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However it plays out, Wall Street economists generally see the taper taking about a year to complete, similar to last time. But at that point they expect the Fed to wait just six months before raising interest rates, half as long as last time, the New York Fed’s April survey of primary dealers indicates.
None of this longer-term planning, though, is yet expected to be part of the Fed’s discussions.
The central bank is due to release fresh quarterly economic forecasts on Wednesday that will show policymakers’ evolving views of the outlooks for unemployment, inflation and economic growth, as well as the likely date of a first rate hike.
The last forecasts, released in March, showed that most policymakers did not expect a liftoff on rates before 2024. Analysts expect no change on that front this week.
Reference: Reuters
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