* Fed on track to reduce monthly bond buys to $55 billion
* U.S. central bank may also rewrite interest rate promise
* Yellen holds first news conference as Fed chair
* New economic and rate projections also on tap
By Ann Saphir
WASHINGTON, March 19 The Federal Reserve is set
to trim its bond-buying stimulus for a third time in a row on
Wednesday, and will probably rewrite its guidance on when it
might eventually raise interest rates.
The moves would represent both continuity at the U.S.
central bank as Janet Yellen chairs her first policy-setting
meeting and a nod to economic reality.
A reduction in the Fed's monthly purchases of Treasuries and
mortgage-backed securities by $5 billion each, as widely
expected, would bring the monthly total to $55 billion and keep
the central bank on track for a measured wind down of the
program as laid out by Yellen's predecessor, Ben Bernanke.
Less certain is what the Fed will do about its interest rate
guidance. It has said since December 2012 that it would not
consider raising short-term rates until the jobless rate dropped
to at least 6.5 percent, as long as inflation looked set to
But the unemployment rate has already dropped to 6.7
percent, in part because of discouraged job hunters giving up
the search, and officials think the economy is still far from
ready for higher borrowing costs.
Top Fed policymakers have indicated they are likely to scrap
the numerical threshold and move to more qualitative guidance,
but exactly how they will frame it is not certain.
The challenge they face is making the change without
shifting market expectations for the timing of a first rate
hike, now seen as coming midway through next year - in line with
views also held by top Fed officials.
Bank of the West chief economist Scott Anderson said the
upshot will probably be "a less transparent, and perhaps less
helpful, qualitative statement" of the economic conditions the
Fed wants to see before raising rates.
It wants to ensure "that another sharp decline in the
unemployment rate for the wrong reasons doesn't send long-term
interest rates soaring on expectations of an imminent rate
hike," Anderson said.
KEEPING MARKETS IN LINE
The Fed has kept overnight rates near zero since December
2008 and has bought more than $3 trillion in long-term debt to
keep borrowing costs down and spur investment and hiring.
It began to scale back its stimulus in December, announcing
it would trim its monthly bond purchases by $10 billion, after
it saw the economy pick up speed in the fall. In January, the
Fed said it would cut the purchases by a further $10 billion.
At the same time, it has sought to tamp down any market
expectations that rate rises will soon follow with its so-called
forward guidance. But the jobless rate threshold could soon be
breached, and officials want to find a more durable way to
telegraph their view on when they will tighten monetary policy.
They want to keep market expectations aligned with their own
forecasts. If traders start to price in earlier rate hikes, the
result would be tighter financial conditions that could deter
the very investment and hiring that the Fed wants to promote.
Even officials who prefer an earlier rate hike want the
Fed's policy-setting committee to avoid surprises that could
lead to market turmoil.
"I'm sure this committee will be interested in doing its
best to communicate about what we foresee for policy," Jeffrey
Lacker, the head of the Richmond Fed, said earlier this month.
Several officials have signaled a preference for qualitative
guidance around a broad set of economic indicators, including
gauges for the labor market and inflation, which is tracking
well below the Fed's 2 percent goal.
The Fed is set to announce its decision in a statement at 2
p.m. (1800 GMT). That will be followed 30 minutes later by
Yellen's first news conference since taking the helm of the
world's most influential central bank on Feb. 1.
Many Fed officials, including Yellen, have said recent
weakness in economic data, from jobs and retail sales to
industrial production and home building, appears largely due to
the unusually harsh winter and should soon dissipate.
If that assessment bears out, Fed officials have signaled
they will likely end the bond-buying program later this year.
On Wednesday, they will also release fresh projections for
inflation, unemployment, economic growth and the likely path of
Forecasts from December showed that most Fed officials saw
rate hikes starting sometime next year and proceeding at a very
gentle pace. With a shift away from guidance that relies on a
specific level of the jobless rate, their views on the likely
path of interest rates is likely to draw even more scrutiny.
(Reporting by Ann Saphir; Editing by Tim Ahmann and Andrea