* Fed expected to begin process of normalizing monetary
* Seen scaling back bond buys to $75 billion per month
* Likely to underscore commitment to hold rates near zero
* Statement at 1800 GMT on Wednesday, news conference at
By Alister Bull
WASHINGTON, Sept 17 The U.S. Federal Reserve is
expected to begin its long retreat from ultra-easy monetary
policy on Wednesday by announcing a small reduction in its bond
buying, while stressing that interest rates will remain near
zero for a long time to come.
Most economists expect the Fed to scale back its monthly
purchases by a modest $10 billion, taking them to $75 billion
and signaling the beginning of the end to an unprecedented
episode of monetary expansion that has been felt worldwide.
The baby step would begin to provide a bookend of sorts to
the central bank's response to the global financial crisis that
reached fever pitch five years ago this week with the collapse
of investment bank Lehman Brothers.
"It is an important milestone ... juxtaposed against five
years ago, when the Fed began the huge expansion of its balance
sheet," said Carl Tannenbaum, chief economist at Northern Trust
in Chicago. "This is going to be the first step, potentially, in
a very, very long walk."
The Fed will announce its decision in a statement following
a two-day meeting at 2 p.m. (1800 GMT), and Fed Chairman Ben
Bernanke will hold a news conference a half hour later. It is
also set to release fresh quarterly economic and interest rate
In slashing overnight rates to zero in late 2008, the Fed
launched an extraordinarily bold campaign to shelter the U.S.
economy. The effort included three rounds of bond purchases that
more than tripled its balance sheet to around $3.6 trillion.
The actions, unthinkable to many within the Fed prior to the
crisis, sparked intense criticism from those who feared the
measures would create an asset bubble or fuel inflation.
But the central bank's show of force was credited with
saving the U.S. and world economies from a much worse fate.
With the U.S. economy now on a somewhat steady, if tepid,
recovery path and unemployment falling, policymakers have said
the time was drawing near to begin ratcheting back their bond
buying with an eye toward ending the program around mid-2014.
While U.S. government bond yields and mortgage rates have
shot higher in anticipation of less Fed support, the central
bank will still be expanding its balance sheet for many more
months as it tries to wean the economy and financial markets
from its ever-expanding stimulus.
YELLEN AND FORWARD GUIDANCE
Fed Chairman Ben Bernanke, in what is likely his penultimate
news conference before stepping down in January, is expected to
reinforce the central bank's commitment to keep overnight rates
near zero for a long time to come as a way to temper any jitters
the bond market may feel.
The forward guidance on rates is aimed at holding down
longer-term borrowing costs, which encompass investors' views on
the path of short-term rates.
That task may have gotten easier after former Treasury
Secretary Lawrence Summers withdrew from the race to replace
Bernanke when his term ends on Jan. 31, restoring current Fed
Vice Chair Janet Yellen to the front-runner position.
Yellen, who would become the first woman ever to hold the
job if nominated by President Barack Obama and confirmed by the
U.S. Senate, could be expected to maintain the policy path set
by the Bernanke-led Fed. Investors and economists were less
certain on where Summers might lead the central bank.
"I think that probably does add to the credibility of the
forward guidance in terms of the greater expectation of
continuity in the basic philosophy and direction of policy,"
said David Stockton, a former senior Fed economist.
"If there had been as much uncertainty about the transition
as there was a week ago, that credibility may have been less
secure," said Stockton, who is now a senior fellow at the
Peterson Institute for International Economics in Washington.
The Fed has said it will not begin raising rates at least
until the unemployment rate hits 6.5 percent, provided inflation
does not threaten to pierce 2.5 percent. The jobless rate stood
at 7.3 percent in August.
But 10-year bond yields have risen more than a percentage
point since Bernanke initially discussed scaling back the Fed's
bond purchases, a signal that investors had brought forward
their anticipated lift-off date for overnight rates.
Some analysts wonder if the Fed might try to hammer home the
message that rates would stay lower for longer by reducing the
unemployment threshold to 6.0 percent.
But it could prove hard for Bernanke to muster sufficient
support from other members of the central bank's policy-setting
committee for such a move.
"They will be hesitant to put in any more explicit forward
guidance," said Dean Maki, chief U.S. economist at Barclays
Capital in New York. "They really cannot credibly say a lot
about 1-1/2 years from now."