This week, members of the Federal Open Market Committee (FOMC), including Federal Reserve Chair Janet Yellen, will hold a meeting over its monetary policy initiative. Experts suggest the Fed is signalling that it will continue with further tapering of its monthly bond-buying quantitative easing program, which has kept long-term interest rates low.
Data indicates that the United States economy has somewhat rebounded from a harsh winter, which will give the Fed reason enough to maintain its tapering measures. This could allow the Fed to move ahead with its current path of exiting from its unconventional methods it applied at the height of the economic collapse.
The taper began in December and the Fed has slashed QE from $85 billion to $55 billion. FOMC members have hinted that the Fed will most likely cut another $10 billion from QE. The current plan is to completely wind it down by the end of the year.
“We anticipate a fairly uneventful Fed meeting. The committee will likely cut the monthly pace of bond purchases from $55 billion to $45 billion… (but) not make any further changes to interest rates or its forward guidance,” IHS Global Insight economists wrote in a note to clients. “The outlook statement on the economy should be monitored, but so far the Fed’s expectation that first quarter weakness was weather-related and temporary appears to be correct.”
Over the past few months, the economic data has been a mixed bag: home sales have stalled mortgage lending contracts have fallen to a 14-year low, the unemployment rate has pretty much remained the same and price inflation has risen sharply. Many have blamed all of this weak information on the weather.
Nevertheless, Yellen said in a speech to the Economic Club of New York earlier this month that she didn’t view the hectic winter weather conditions as anything of significant or material to definitive economic numbers.
“The unusually harsh winter weather in much of the nation has complicated this judgment, but my FOMC colleagues and I generally believe that a significant part of the recent softness was weather-related,” said Yellen. This was a signal that QE tapering would persist, according to financial analysts.
It should be noted, though, that there are some key announcements being made this week that could cause adverse effects: Pending Home Sales Index and the Dallas Federal Reserve Manufacturing Survey (Monday); Case-Shiller Home Price Index and Consumer Confidence (Tuesday); ADP Employment Report, GDP numbers and Chicago PMI; (Wednesday), Jobless Claims, Personal Income and Outlays and ISM Manufacturing Index (Friday); and non-farm payrolls report (Friday).
Despite many viewing that additional tapering of QE is a positive step and a sign that the U.S. economy is getting better, there are some critics that argue the Fed will likely taper the taper talk because the nation’s economy isn’t sound and needs its monthly stimulus.
“Central banks are creating too much money, there’s too much inflation, interest rates are too low, and so I want to store my purchasing power in something that central banks can’t print,” said Peter Schiff, president of Euro Pacific Capital, in an interview on CNBC. “I think we’re headed much higher because they are not going to stop the presses. They are going to run them into overdrive.”
Others are concerned that the Fed is continuing to inflate the stock market and producing more bubbles, particularly in the bond and housing markets.
