As Fed meets, key issues likely to stay unanswered

Fed widely expected to make sixth reduction in bond purchases at this week's meeting

Associated Press
Fed offers a dual message on health of US economy
.

View photo

FILE - In this July 2, 2014, file photo, Federal Reserve Chair Janet Yellen speaks at the International Monetary Fund in Washington. The Federal Reserve is widely expected to make sixth reduction in bond purchases Wednesday, July 30, 2014. (AP Photo/Susan Walsh, File)

WASHINGTON (AP) -- The Federal Reserve will likely end a policy meeting Wednesday with a lot of questions unanswered:

When will it start tightening its benchmark short-term interest rate to make sure future inflation remains under control? How will it do so? And when will the Fed start reducing its enormous investment holdings — a move that will put upward pressure on interest rates?

Chair Janet Yellen gave few hints about the answers to such issues when she testified to Congress this month. And most analysts don't think the central bank will fill in any of the blanks when it ends a two-day meeting with a brief policy statement. There will be no Yellen news conference this time.

One announcement that is expected is that the Fed will make a sixth $10 billion cut in its monthly bond purchases, which have been aimed at keeping long-term rates low.

A key reason is that the economy needs less help now. Hiring is solid, and, at 6.1 percent, the unemployment rate is on the cusp of a historically normal range. Manufacturing is strengthening. Consumers are voicing renewed confidence.

Still, the economy isn't back to full health.

Workers' pay remains flat. Turmoil overseas, from Ukraine to the Middle East, poses a potential threat. And as Yellen noted in her congressional appearance, long-term unemployment remains high and wage growth weak.

For that reason, the Fed is expected to reaffirm its plan to leave its key short-term rate at a record low near zero "for a considerable time" after it ends its bond purchases.

"There are so many uncertainties, both economic and political, that the Fed wants to leave plenty of wiggle room," said Sung Won Sohn, an economics professor at California State University, Channel Islands.

The Fed will almost surely announce that it's reducing its monthly bond purchases from $35 billion to $25 billion. When the Fed started cutting the purchases in December, they stood at $85 billion a month.

The Fed intends to end its new purchases by October. By then, its investment portfolio will be nearing $4.5 trillion — five times its size before the financial crisis erupted in September 2008.

After the crisis struck, the Fed embarked on bond purchases to try to drive down long-term rates and help the economy recover from the Great Recession. Even after its new bond purchases end, the Fed has said it will maintain its existing holdings, which means it will continue to put downward pressure on rates.

The Fed has kept its target for short-term rates near zero since December 2008. Most economists think it will start raising rates by mid-2015, though some caution that the Fed could do so sooner if the economy keeps generating jobs at a robust pace. There have been five straight months of 200,000-plus job growth.

Mark Zandi, chief economist at Moody's Analytics, said he thinks chronically lagging pay growth, in particular, will stop the Fed from raising rates before mid-2015.

Besides discussing short-term rates, Fed officials this week are likely debating how to unwind their investment holdings. They face a delicate task in shrinking the portfolio to more normal levels without destabilizing markets. The Fed's bond purchases allowed it to inject money into the financial system, which wound up as reserves held by banks and helped keep loan rates low.

To reverse that process and raise borrowing rates, the Fed is considering a variety of tools. One would be to increase the interest it pays banks on excess reserves they keep at the Fed.

David Jones, author of a new book on the central bank's 100 year history, said any new exit details might not be revealed until the Fed releases the minutes of this week's meeting in three weeks. Those minutes, Jones said, "may be the most interesting thing to come out of the meeting."

Rates

View Comments (12)

Recommended for You

  • Tycoon buys 30 Rolls-Royces for Macau hotel

    A Hong Kong tycoon has placed the biggest ever order for Rolls-Royce cars, agreeing to buy 30 Phantoms to chauffeur guests at a luxury resort he's building in the global gambling capital of Macau. Stephen Hung's $20 million purchase surpasses the 14 Phantoms bought by Hong Kong's Peninsula Hotel in…

    Associated Press
  • 1 Tip To Lose Belly Fat

    It's Hollywood's Hottest Diet And Gets Rid Of Stubborn Fat Areas Like Nothing Else.

    AdChoicesagoodcooksSponsored
  • Before You Buy Alibaba, Check Out 4 Top China Stocks

    Before You Buy Alibaba, Check Out 4 Top China Stocks While investors gear up for Alibaba Group 's (BABA) hotly anticipated initial public offering, don't forget about other Chinese stocks that are worth keeping an eye on. Today's Young Guns Screen of

    Investor's Business Daily
  • Only 4 states will see cuts to food stamps

    Cuts to the nation's food stamp program enacted this year are only affecting four states, far from the sweeping overhaul that Republicans had pushed, an Associated Press review has found. As a result, it's unclear whether the law will realize the estimated $8.6 billion in savings over 10 years that…

    Associated Press
  • Play

    Citi, Bank of America Offer Discounted Mortgages

    Citigroup and Bank of America will offer mortgages at discounted interest rates to help borrowers with low incomes or subprime credit. AnnaMaria Andriotis joins MoneyBeat. Photo: Getty.

    WSJ Live
  • "The Retiree Next Door": How successful retirees stretch their savings

    "The Retiree Next Door": How successful retirees stretch their savingsBy the time she hit her late 40s, Toni Eugenia wasn’t sure she would ever be able to retire. Eugenia, 56, a pharmacy technician who lived in Houston, was nearly $200,000 in debt and

    Yahoo Finance
  • SHOE COMPANY: Our CEO Just Disappeared And Most Of The Money Is Gone

    "and like that: he's gone." This is an actual headline from a company press release: "CEO and COO disappeared, most of the company's cash missing." (Via FastFT) In a statement, German-based shoe company Ultrasonic said its CFO,  Chi Kwong Clifford Chan, has been unable to reach the company's CEO,…

    Business Insider
  • Apple to unveil new iPads, operating system on Oct. 21 : report

    The company plans to unveil the sixth generation of its iPad and the third edition of the iPad mini, as well as its operating system OS X Yosemite, which has undergone a complete visual overhaul, the Internet news website said. Trudy Muller, a spokeswoman for Apple, declined to comment. The iPad is…

    Reuters
  • Best Womens Wrinkle Creams 2014

    Mom reveals simple wrinkle solution that has researchers very excited. Try this free solution today to look and feel years younger.

    AdChoicesBellaLabs.comSponsored
  • Margaritaville casino owners seek bankruptcy

    The owner of Biloxi's Margaritaville casino has filed for Chapter 11 bankruptcy protection Tuesday, only hours before a hearing where the landlord aimed to seize the property. The filing by MVB Holding LLC in U.S. Don Dornan, a lawyer for landlord Clay Point LLC, said the company had planned to ask…

    Associated Press
  • Here's What Mark Cuban Wishes He Knew About Money In His 20s

    Cuban is the owner of the Dallas Mavericks basketball team. Billionaire investor and entrepreneur Mark Cuban is generous with his advice. When we asked him what he wishes he'd known about money in his 20s, he said:

    Business Insider
  • Embraer to sell 50 E-175 jets to Republic in $2.1 billion deal

    Brazil's Embraer SA, the world's third largest commercial planemaker, said on Wednesday it booked a firm order from U.S. The deal, which will be included in Embraer's order book for the third quarter, is valued at $2.1 billion, the planemaker said in a securities filing. The planes will be operated…

    Reuters
  • Gold loses luster on Fed; Barclays cuts forecast

    Barclays cuts gold forecasts, sees increasingly bearish backdrop Bloomberg MA MB MC MD ME SAN FRANCISCO (MarketWatch) — Gold prices dipped Wednesday on concerns about a stronger dollar ahead of the Federal Reserve policy statement and in response to Barclays lowering its gold forecast.

    MarketWatch
  • Billionaire Investor Says Chinese People Work Harder And Western Companies Could Face Deep Trouble After Alibaba IPO

    Michael Moritz, the chairman of VC firm Sequoia Capital, is a huge fan of Chinese internet companies and reiterated his enthusiasm for the Chinese market in an interview with The Wall Street Journal Wednesday. The billionaire investor described the Alibaba IPO as a “major landmark event” that is as…

    Business Insider
  • Fed renews zero rate pledge, but hints at steeper rate hike path

    The Federal Reserve on Wednesday renewed its pledge to keep interest rates near zero for a "considerable time," but also indicated it could raise borrowing costs faster than expected when it starts moving. In a statement after a two-day meeting of its policy-setting Federal Open Market Committee,…

    Reuters
  • Tired of Living Paycheck to Paycheck?

    New website reveals how to save $1,000's when you're living paycheck to paycheck. See exactly how.

    AdChoices Media ForceSponsored
  • Top Analyst Upgrades and Downgrades: AEP, BHP, GE, Incyte, 3M, Tyco, Under Armour and More

    Top Analyst Upgrades and Downgrades: AEP, BHP, GE, Incyte, 3M, Tyco, Under Armour and More Stocks were firm on Wednesday morning ahead of the FOMC meeting outcome. Tuesday’s rally may have sparked higher interest again, and investors are looking for bargains

    24/7 Wall St.
  • Boeing may have outfoxed Musk, but it could have bigger problems

    Elon Musk is arguably one of the greatest entrepreneurial minds of the 21st Century, but he was outsized an old school aerospace giant. Boeing won the bulk of NASA’s contract for a space taxi.  One of the other companies vying for the deal is SpaceX, the company headed by Tesla’s Musk, will get a…

    Talking Numbers
  • Romney-Sized IRAs Scrutinized as Government Studies Taxes

    The preliminary report attaches data to an issue that drew attention during the 2012 presidential campaign, when Republican nominee Mitt Romney reported an IRA worth $20 million to $102 million. Senate Finance Committee Chairman Ron Wyden said many of these "massive" accounts come from deals…

    Bloomberg
  • Russian billionaire placed under house arrest

    A billionaire Russian tycoon was placed under house arrest Tuesday in a money-laundering case that has drawn comparisons with a government crackdown on Russia's Yukos oil company more than a decade ago. The Investigative Committee, Russia's top investigative agency, said that Vladimir Yevtushenkov,…

    Associated Press
  • Play

    What the Fed Meeting Means for Bonds

    Janet Yellen & Co. are expected to hint at their timetable for raising interest rates. Here's how investors should prepare ahead of the meeting.

    WSJ Live
  • The Government Keeps Helping People Buy Failing Cold Stone Creamerys

    Would you loan someone money to buy a Cold Stone Creamery franchise if you knew that more than a quarter of those loans default? Over the last decade, franchisees in the Cold Stone Creamery ice cream chain defaulted on 29 percent of working-capital loans backed by the government, costing taxpayers…

    BusinessWeek
  • The New 2015 Sonata®: A Step Above the Competition

    There's a Sonata® that's perfect for you, and this is your chance to build it! Visit the Hyundai® Official Site to customize your 2015 Sonata® today!

    AdChoicesHyundaiSponsored
  • Facebook Is Hiding Important Information From Investors

    Facebook Is Hiding Important Information From Investors Facebook.com/sheryl On July 23, when Facebook reported its earnings for the second quarter, the company stunned everyone. Revenues were $2.68 billion, up 67% from the same quarter during the year

    Business Insider