The Federal Reserve is set to trim its bond-buying stimulus for a third time in a row on Wednesday, and will probably rewrite its guidance on when it might eventually raise interest rates.
Reuters reported on Wednesday that the moves would represent continuity at the United States central bank as Janet Yellen chairs her first policy-setting meeting and a nod to economic reality.
A reduction in the Fed’s monthly purchases of Treasuries and mortgage-backed securities by $5bn each, as widely expected, would bring the monthly total to $55bn and keep the central bank on track for a measured wind down of the program as laid out by Yellen’s predecessor, Ben Bernanke.
Less certain is what the Fed will do about its interest rate guidance. It has said since December 2012 that it would not consider raising short-term rates until the jobless rate dropped to at least 6.5 per cent, as long as inflation looked set to remain contained.
But the unemployment rate has already dropped to 6.7 per cent, in part because of discouraged job hunters giving up the search, and officials think the economy is still far from ready for higher borrowing costs.
Top Fed policymakers have indicated they are likely to scrap the numerical threshold and move to more qualitative guidance, but exactly how they will frame it is not certain.
The challenge they face is making the change without shifting market expectations for the timing of a first rate hike, now seen as coming midway through next year – in line with views also held by top Fed officials.
Bank of the West chief economist Scott Anderson said the upshot will probably be “a less transparent and perhaps less helpful, qualitative statement” of the economic conditions the Fed wants to see before raising rates.
It wants to ensure “that another sharp decline in the unemployment rate for the wrong reasons doesn’t send long-term interest rates soaring on expectations of an imminent rate hike,” Anderson said.
The Fed has kept overnight rates near zero since December 2008 and has bought more than $3tn in long-term debt to keep borrowing costs down and spur investment and hiring.