Fed starts meeting, seen noting improving economy

By @ibtimes on

The Federal Reserve opened a two-day meeting on Tuesday that was expected to end with a recognition the U.S. economy is on the mend, but no hint of an imminent monetary policy shift.

The Fed's policy-setting Federal Open Market Committee began conferring at around 2 p.m. EDT, a spokesperson said. The central bank is expected to issue a statement about policy and the economic outlook at around 2:15 p.m. EDT on Wednesday.

The Fed seems certain to hold benchmark interest rates near zero, and most economists do not see it raising them until the middle of next year at the earliest.

Policy-makers, however, are widely expected to discuss ways to pull back their massive provisions of cash to the economy in a way that preserves the recovery, while preventing inflation.

A key question that will be on the table is how soon and how rapidly the Fed should conclude its planned purchases of mortgage-related securities. It has said it will buy up to $1.25 trillion of mortgage-backed securities and $200 billion of housing agency debt by the end of the year.

After pressing interest rates close to zero in December, the Fed turned to asset purchases as a way to drive down mortgage costs and support the economy.

Most analysts expect the Fed to stretch its purchases of mortgage-related securities into the beginning of next year to allow a tapering off that is less disruptive to markets.

The Fed already has announced it would taper off purchases in a separate program to buy up to $300 billion in longer-term U.S. Treasury securities by the middle of next month.

It is hard to rule out a somewhat slower-than-earlier envisioned pace at which the Fed meets its plans for mortgage-linked securities purchases, UBS Securities economist Maury Harris wrote in a research note.

While some Fed watchers think an announcement on the program's future could come on Wednesday, others think the central bank's next policy meeting in early November marks a more natural decision point.

FED HAWKS SPREAD THEIR WINGS

The future of the program is less clear cut than that of the Treasuries purchase plan, which many analysts believed was ineffective at lowering borrowing costs and which raised worries the central bank was printing money to finance a surge in U.S. government spending.

Two voting members of the FOMC have said curtailing the mortgage securities buying program should be on the table in light of the improving economy. Richmond Federal Reserve Bank President Jeffrey Lacker, a noted anti-inflation hawk, questioned whether the economy needs the additional stimulus.

At the other extreme of the debate is San Francisco Fed President Janet Yellen, who said high unemployment and falling price indicators meant the central bank should worry about the risk of a damaging deflationary cycle rather than inflation.

Fed Chairman Ben Bernanke said recently that while the recession appears to be over, the recovery will be sluggish, suggesting Fed will move cautiously in unwinding its programs to boost the economy.

Slack in the labor markets and diminished consumer demand should keep a lid on any near-term inflation pressures, Moody's Economy.com economist Joseph Brusuelas wrote in research note.

(Reporting by Mark Felsenthal; Editing by Andrea Ricci)

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