* Monthly bond purchases of $85 bln seen extending to March
* Fed could flag soft data in hint no change until 2014
* Upcoming Fed leadership transition could impact thinking
By Alister Bull
WASHINGTON, Oct 30 The Federal Reserve is
expected to maintain its massive bond-buying campaign when it
concludes a two-day meeting on Wednesday and may point to softer
readings on the U.S. economy to signal that the policy will be
extended into 2014.
The central bank, which will announce its policy decision at
2 p.m. (1800 GMT), has held interest rates near zero since late
2008 and has quadrupled the size of its balance sheet to more
than $3.7 trillion through three rounds of bond buying. The
purchases are aimed at holding down longer-term borrowing costs.
It shocked markets in September by opting to keep buying
bonds at an unchanged pace, after allowing a perception to
harden over the summer that it was ready to start scaling back
the purchases. Its caution has since been vindicated.
Consumer and business confidence has been dented by a bitter
budget battle in Washington that triggered a 16-day government
shutdown earlier this month and pushed the nation to the brink
of a potentially devastating debt default, and a slew of
economic data has pointed to economic weakness.
"I think you will certainly see a change in tone in the
statement," said Scott Anderson, chief economist at Bank of the
West in San Francisco.
Like many economists, Anderson now thinks the Fed will keep
buying bonds at an $85 billion monthly pace until March.
Reports on Wednesday showed U.S. private-sector employers
hired the fewest number of workers in six months in October,
while inflation stayed under wraps last month.
Other recent data on hiring, factory output and home sales
in September had already suggested the economy lost a step even
before the government shut down. Readings on consumer confidence
this month have shown the fiscal standoff rattled households.
The signs of weakness and the absence of inflation pressure
are expected to convince the Fed's policy-setting Federal Open
Market Committee to maintain its asset purchase course.
"The October government shutdown has undoubtedly slowed down
the economy in the fourth quarter," economists at Rabobank wrote
in a note to clients. "It will be 2014 before we are able to see
a number of months of economic data that may convince the FOMC
that the recovery is continuing at a solid pace."
NO RATE HIKES BEFORE LATE 2015
The soft tone in the data has led financial markets to
recalibrate forecasts for a tapering in the Fed's bond
purchases. It has also pushed rate hike expectations back into
mid-2015 at the earliest.
"It is looking like most of the hikes would happen in 2016,"
said Anderson, adding that the shift in expectations has helped
pull bond yields lower.
Futures markets indicate a 52 percent chance of the first
quarter-point rate hike by April 2015; that rises to 96 percent
by September 2015. Yields on the 10-year U.S. Treasury note have
fallen back to 2.50 percent, compared with almost 3 percent in
NEW FED CHIEF
A further wrinkle in the Fed's deliberations is the upcoming
leadership transition at the central bank. Earlier this month,
President Barack Obama nominated Fed Vice Chair Janet Yellen to
replace Ben Bernanke at the institution's helm when his term
expires on Jan. 31.
Some economists think Bernanke would like to begin reducing
the bond purchases on his watch, provided the economic data was
But if policymakers wait until March, it would presumably
give Yellen an opportunity to lean against criticism that she is
too dovish in how she weighs unemployment versus inflation.
That question will be a central theme of her confirmation
hearing before the U.S. Senate Banking Committee. The hearing is
likely to be held on Nov. 14.
Yellen is expected to win confirmation from the Senate but
will face tough questions from Republicans critical of the Fed's
ultra-easy monetary policy, which they say risks financial
instability and future inflation.
The banking panel needs to vet her nomination before it goes
before the full Senate for final approval.