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Fed divided on when to slow bond purchases

WASHINGTON — The Federal Reserve is torn over when to slow its aggressive efforts to stimulate the economy.

Its uncertainty burst into view Wednesday, when Chairman Ben Bernanke testified to Congress in the morning and the Fed released the minutes of its last policy meeting in the afternoon.

Bernanke testified he believes it is too soon for the Fed to pull back on its support for the economy, including its $85 billion a month in Treasury and mortgage bond purchases. But minutes from the Fed's April 30-May 1 meeting showed that several members favored cutting the level of purchases, perhaps as early as June. Even that was hard to decipher because the minutes said members would have to agree that the economy had shown strong and sustained growth before the Fed would slow its bond purchases.

The Fed is buying the bonds to try to ease long-term borrowing costs, encourage borrowing and accelerate growth. And it has said it will maintain its pace of bond purchases until the job market improves substantially.

Economists don't expect the Fed to curtail the bond purchases next month. But Paul Ashworth, chief U.S. economist for Capital Economics, said the September meeting is a real possibility.

For one thing, Bernanke told lawmakers Wednesday that the Fed might reduce the purchases within the next few meetings if the job market showed "real and sustainable progress." Still, whatever the Fed does is likely to be done gradually, Ashworth said.

"It could begin with a relatively trivial reduction to gauge market reaction," he said.

Most of Bernanke's testimony Wednesday to the Joint Economic Committee focused on the many risks the U.S. economy still faces and the help the Fed's support programs have provided. His remarks suggested that the Fed isn't ready to taper the bond purchases.

In recent weeks, the job market and the broader economy have shown renewed vigor. The unemployment rate has reached a four-year low of 7.5 percent. A resurgent housing market has helped lift consumer confidence. And a powerful stock market rally has made many consumers feel wealthier.

Unemployment does remain well above levels consistent with healthy economies. And some economic sectors, including manufacturing, are struggling. Bernanke also said higher taxes and deep federal spending cuts will likely slow growth this year.

David Wyss, a former Fed economist who teaches at Brown University, said recent economic data has been mixed, suggesting that the Fed is unlikely to change course soon.

"I can't see them doing anything before fall, and they may well wait until next year," he said.

And when the Fed does start trimming its bond purchases, Wyss predicts they will cut the pace to about $50 billion as a first step and then spend most of 2014 gradually reducing that level to zero.

He expects investors' reaction by then to be "fairly muted."

"I would assume the market will be expecting it by the time they finally do it," Wyss said.

Fed divided on when to slow bond purchases 05/22/13 [Last modified: Wednesday, May 22, 2013 10:12pm]
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