- POSTED: 18 Dec 2013 06:10
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The Federal Reserve began a two-day policy meeting on Tuesday that will debate whether the US economy is strong enough to scale back its huge stimulus.
WASHINGTON: The Federal Reserve began a two-day policy meeting on Tuesday that will debate whether the US economy is strong enough to scale back its huge stimulus.
The Fed has stressed that any taper of its $85 billion a month asset-purchase program was data-dependent, and so far the data has been decidedly mixed.
Encouraging economic indicators recently have led some analysts to expect the Federal Open Market Committee will announce a trim on Wednesday.
But others expect the FOMC will hold off until the January or March meetings to make sure the economy is heading in the right direction.
A pair of November data points on Tuesday suggested the Fed could opt to wait on a taper this week. Consumer prices were unchanged compared with October and up a tame 1.2 per cent from November 2012, signaling inflation remains well below the Fed's 2.0 per cent annual target.
And income growth for Americans -- a key indicator of the health of the economy -- remained modest at 1.1 per cent year-over-year.
"With benign prices and a tepid labor market, both sides of the Fed's dual mandate calls for further stimulus by the Fed, not less. This will be a prime concern heading into the FOMC meeting today and tomorrow: is it safe to taper in the midst of disinflation?" said Jay Morelock of FTN Financial.
Tilting bets for tapering has been the modestly improving labour market following the severe 2008-2009 recession. The unemployment rate fell sharply in November to a five-year low of 7.0 per cent and job growth accelerated, but labour force participation remained near historic lows.
The December FOMC meeting marks the first anniversary of the $85 billion in monthly QE3 purchases after the Fed decided the economy needed another boost to offset the drag on economic growth of looming tax increases and steep government spending cuts due to take effect in 2013.
Tapering the third round of quantitative easing would signal the beginning of the end of the Fed's five-year crisis stance, a major step toward the normalization of monetary policy, including an eventual increase in the key federal funds interest rate.
Since May, when Fed Chairman Ben Bernanke began talking about reducing the quantitative easing stimulus he started in 2008, markets have expected the start of the taper, with bond yields and lending rates, especially mortgage rates, jumping more than one percentage point in anticipation.
Moody's Analytics put the odds that the FOMC will announce plans to scale back its quantitative easing stimulus Wednesday at 50-50.
"Although the economic implications of starting this month as opposed to later are small, the market response could matter more. The Fed mustn't spook investors," said Moody's economist Ryan Sweet.
"While recent data may justify a taper now, the Fed has been non-committal. Policy-makers may not want to start in December because of normal year-end liquidity concerns."
Stocks pared earlier losses on Tuesday as investors awaited the Fed decision.
The Dow Jones Industrial Average finished slightly lower, down 0.06 per cent at 15,875.26, and the broad-market S&P 500 lost 0.31 per cent at 1,781.00.