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Fed meet to discuss stimulus cuts
Aggregated Source: Shanghai Daily: Business

UNITED States Federal Reserve officials this week are likely to have a lively debate on how best to prepare financial markets for a reduction of their bond-buying program, but appear certain to wait for further economic data before curtailing their stimulus.

While the debate will not produce much in the way of policy change, officials may tweak their post-meeting statement to lay the groundwork for paring their US$85 billion-a-month bond purchase program as early as September. The Fed releases its post-meeting statement tomorrow.

"They may hint that some tapering is likely if the economy continues to grow," said Eaton Vance portfolio manager Eric Stein, noting that Fed Chairman Ben Bernanke already laid out a time-line for ending the purchases by mid-2014 at a news conference after the Fed's last meeting held on June 18-19.

When bond yields surged after Bernanke's remarks, the chairman and other Fed officials turned out in force to convince markets that drawing the bond buying to a close does not mean that their support for the economy would disappear.

They had some success re-anchoring rate expectations. Futures markets are pricing in a first rate hike no sooner than January 2015. They had been betting on a hike as early as October 2014, earlier than all but four of the Fed's 19 policymakers see as appropriate.

With traders ready to drag market rates sharply higher at any hint of tighter policy, investors will mine any changes in the central bank's post-meeting statement to gauge how closely the pace of recovery is tracking the Fed's own expectations, a key metric for judging if the central bank will go through with its plan to pare its bond buying later this year.

A government report tomorrow is expected to show economic growth weakened in the second quarter, but a separate report on Friday is expected to show the unemployment rate ticked down in July to 7.5 percent from 7.6 percent in June.

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Copyright Shanghai Daily: Business





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