Fed seen holding steady policy course but could hint on exit

Washington, June18 Wed Jun 18, 2014 8:51am EDT

Federal Reserve Chair Janet Yellen arrives to receive her honorary doctorate degree from New York University (NYU) at Yankee Stadium in the Bronx borough of New York May 21, 2014.  REUTERS/Carlo Allegri

Federal Reserve Chair Janet Yellen arrives to receive her honorary doctorate degree from New York University (NYU) at Yankee Stadium in the Bronx borough of New York May 21, 2014.

Credit: Reuters/Carlo Allegri

Washington, June18(Reuters) - The Federal Reserve's policy committee concludes its latest meeting on Wednesday with little change expected in its outlook for interest rates but the potential for new details to emerge on the planned exit from its current easy monetary policy.

The U.S. central bank is widely expected to decide on a further $10 billion reduction in its monthly bond buying, staying on course to shutter the program entirely by year end.

It will announce its decision and release fresh economic and interest rate projections at 2 p.m. EDT (1800 GMT). Fed Chair Janet Yellen will hold a news conference to discuss the results a half hour later.

The interest rate "dots" plotting the views of each policymaker will be watched closely for any shift in the expected timing or pace of rate increases, and for whether officials lower their view of the long-run target interest rate in response to a diminished sense of the economy's potential.

The Fed cut overnight rates to near zero in December 2008 as it battled the financial crisis and deep recession.

Investors in futures markets predict it will finally lift them in June 2015, while the consensus of economists in a Reuters poll released on Tuesday expected the Fed to begin raising rates in the third quarter of next year. ECILT/US

The meeting will include a few new faces around the table: Fed Vice Chair Stanley Fischer and Fed Governor Lael Brainard. Brainard, however, was sworn in too late to submit economic and interest rate projections.

While the Fed's policy statement is still expected to call for rates to remain near zero "for a considerable time," Diane Swonk, chief economist at Mesirow Financial, said she expected the individual forecasts to begin to diverge.

Many economists have cut their growth forecasts for the year due to a dismal first quarter that was largely the product of severe winter weather but also reflected a slower than expected expansion of housing and business investment, and the Fed is expected to follow suit.

Though growth is expected to accelerate in 2015, Swonk said there are doubts the recovery is robust enough for the Fed to feel confident about a rate increase.

"It is a sense of two steps forward, one step back," said Swonk as she presented a mid-year forecast of the Securities Industry and Financial Markets Association on Tuesday. The Fed "is going to stay the course, but I think you are going to see more uncertainty" in the economic outlook and more dispersion among officials about when rates should rise.

One central issue facing the Fed as it contemplates a move away from its crisis-era monetary policy is whether and for how long to keep its bloated balance sheet from shrinking by reinvesting proceeds from maturing securities it holds. The Fed has more than quadrupled its balance sheet to $4.3 trillion through a series of large-scale bond purchases.

If any decisions are taken, Yellen could make an announcement at her news conference.

(Reporting by Howard Schneider; Editing by Paul Simao)

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Comments (4)
Those rate increases are going to be interesting. Each point of interest is $180 Billion in non discretionary outlay to service the National debt. The best that we may see is a return to stagflation from the Jimmy Carter years. That is where the middle class found themselves in the rich brackets for taxes and retirees were eating dog food because their checks no longer covered the basics. They also cite a false indicator with the unemployment rate. We are loosing workforce. Like a person being bed ridden, the muscles that allow us to move are in atrophy.

Jun 18, 2014 10:49am EDT  --  Report as abuse
Simplerman wrote:
Once that inflation takes off it’s GAME OVER for the US economy, so plan accordingly.

By the way, this economic foot soldier says we’re already back in Recession.

Jun 18, 2014 12:29pm EDT  --  Report as abuse
TheseusRex wrote:
The seriously challenged US government (I should say, its “leaders”)_continues to fail to recognize that the low interest rate is the major force holding the economy back. Forty million retired people saved money, planning to use the interest to help with their retirement. If interest rates were where they should be, both the retirees and other savers would be spending more and the economy would be on the move.

Jun 19, 2014 10:02am EDT  --  Report as abuse
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