WASHINGTON (AP) — This much is clear: The Federal Reserve will make another cut this week in its monthly bond purchases, which have been aimed at keeping long-term loan rates low.
This much is not: When will the Fed start tightening its interest-rate policy to thwart any runaway inflation? How will it do so? And when will the Fed start paring its enormous $4 trillion-plus investment portfolio — a step that will put upward pressure on interest rates?
On those questions, expect no definitive signals Wednesday, when the Fed issues a statement after a two-day policy meeting. In many ways, the improving U.S. economy no longer needs so much help from the central bank: Hiring is solid, and unemployment is on the cusp of a nearly normal 6 percent rate. Manufacturing is strengthening. Consumers are voicing renewed confidence.
Yet in other ways the economy the Fed will assess this week is less than fully healthy. The housing rebound appears to be faltering. Workers' pay remains flat. Turmoil overseas poses a potential threat. And even the sinking unemployment rate isn't as encouraging as it seems: It's dropped in part because many people have given up on their job searches or retired early. The government doesn't count people as unemployed unless they're actively seeking work.
Accordingly, 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.
"The economy is doing a little bit better, but there are still a lot of risks out there," said David Wyss, an economics professor at Brown University, noting global turmoil from Ukraine to the Middle East.
The statement the Fed will release will almost surely announce a sixth $10 billion cut in its monthly bond purchases to $25 billion. Chair Janet Yellen told Congress this month that 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 — five straight months of 200,000-plus increases.
Still, in testifying to Congress, Yellen stressed that at 6.1 percent, the unemployment rate still exceeds the Fed's target of 5.2 percent to 5.5 percent. And she noted that high levels of long-term unemployment and weak wage growth are still a problem.
Continue reading this story on the...