January 29, 2014 / 12:00 PM / 4 years ago

WRAPUP 2-Fed poised for further $10 billion taper as Bernanke bids adieu

* Bernanke’s last meeting as chair before Yellen takes reins

* Fed expected to cut bond buying to $65 billion monthly

* Policy decision to be announced at 2 p.m. EST (1900 GMT)

By Ann Saphir and Jonathan Spicer

Jan 29 (Reuters) - Turmoil in emerging markets and a month of disappointing job growth at home are unlikely to deter the Federal Reserve from trimming its bond-buying stimulus on Wednesday, as Ben Bernanke wraps up his last policy meeting at the helm of the U.S. central bank.

Overall signs of improvement in the U.S. economy suggest Fed officials will stay on track to cut monthly purchases of Treasuries and mortgage-backed securities by $5 billion each, bringing the total of their monthly asset purchases to $65 billion.

The meeting is Bernanke’s last before Vice Chair Janet Yellen moves into the top spot.

Bernanke took the Fed far into uncharted territory during his eight years on the job, building a $4 trillion balance sheet and keeping interest rates near zero for more than five years to pull the economy from its worst downturn in decades.

With those efforts beginning to pay off - and concerns growing over possible harm from so much money printing - the Fed announced plans last month to phase out the bond buying by late this year unless the economy takes a decided turn for the worse.

It started by trimming its monthly purchases to $75 billion from $85 billion, and on Wednesday, the U.S. central bank is expected to shave another $10 billion.

“It’s clear the Fed wants to taper,” said Eric Stein, portfolio manager at Eaton Vance in Boston.

Even so, the Fed is nowhere near to making a decision to raise rates. Policymakers are expected to stick to their promise to keep rates near zero until well after the U.S. unemployment rate, now at 6.7 percent, falls to 6.5 percent. The Fed is set to announce its decision at 2 p.m. EST (1900 GMT).

A dismal employment report for December, which showed businesses added far fewer jobs than expected, raised some doubts about the Fed’s commitment to keep tapering its stimulus.

But other data in recent weeks, from consumer spending and confidence to industrial production, was largely upbeat and has bolstered the view of an improving economy. Forecasters estimate U.S. GDP grew at an above-trend annual rate of 3.2 percent in the fourth quarter after notching a 4.1 percent advance in the prior three months.

The show of strength provides a welcome backdrop for Bernanke, who steps down on Friday after an unusually tumultuous and highly experimental stint atop the world’s most influential central bank.


Steep losses in emerging market assets over the past week led some to question whether the Fed might put plans to trim its bond buying on hold, but policymakers have given no indication that they would be deterred.

A decision by Turkey’s central bank to sharply raise its main interest rates initially helped calm markets overnight, but the selloff later resumed and U.S. stocks opened lower.

Analysts said the prospect of less Fed stimulus was just one factor contributing to investor jitters, with signs of slower growth in China and political turmoil in countries from Turkey to Thailand playing a bigger role in fueling the emerging market stress.

Unless the selling snowballs into a true crisis, few Fed watchers think the U.S. central bank will respond.

“It would take a full-blown crisis that ensnares all (emerging market economies) to have a material effect on the U.S. economy, and I don’t think that’s what they see,” said Roberto Perli, a former Fed official who is now a Washington-based partner at economic research firm Cornerstone Macro.

“Clearly emerging market financial markets are in turmoil for reasons that have little or nothing to do with the Fed likely tapering again.”

That is not to say the decision will be a slam dunk.

Dallas Federal Reserve Bank President Richard Fisher, who is a voter on the central bank’s policy-setting panel this year, has argued for a more aggressive withdrawal of purchases.

On the other end of the spectrum, Minneapolis Fed President Narayana Kocherlakota, also a voter, has argued for more, not less, stimulus, and that view could translate into a dissent.

Still, the Fed puts a high premium on consensus, and Kocherlakota may feel that presenting a united front on policy could be a stabilizing force for financial markets, Eaton Vance’s Stein said.

“I don’t think it’s completely pro forma,” he added, “but I do think the consensus of the committee is to taper, about in line with the last meeting.”

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