Investors look for answers on economy from Fed
WASHINGTON -- Worry and speculation have consumed investors since Chairman Ben Bernanke spoke to Congress last month about the Federal Reserve’s drive to keep long-term interest rates at record lows.
On Wednesday, many hope the Fed will settle the confusion.
Will the Fed scale back its $85 billion-a-month in bond purchases within "the next few meetings," as Bernanke suggested during his remarks to Congress? Or does the job market remain too weak for the Fed to slow its stimulus, as Bernanke said at another point?
The Fed’s bond purchases have been intended to hold down long-term loan rates to induce Americans to borrow and spend and invest in the stock market. Ultra-low rates are credited with helping fuel a housing comeback, support economic growth, drive stocks to record highs and restore the wealth America lost to the recession.
Conflicting statements from other Fed officials have further clouded the outlook for the bond-buying program. That’s why the pressure for the Fed to clarify its message has intensified in recent weeks.
Here’s what to look for from each of four key events Wednesday: a statement the Fed will issue when its two-day meeting ends; the Fed’s updated economic outlook; Bernanke’s news conference; and the reaction of investors:
-- FED STATEMENT
A big question is whether the Fed will revise the stance it’s taken in the statements issued after its most recent policy meetings: That it will continue to buy $85 billion a month in Treasury and mortgage bonds -- and that its bond purchases will continue until the outlook for the job market "has improved substantially."
The Fed has not defined "substantially." And Bernanke has stressed that the Fed could increase or reduce its bond purchases at any time depending on the economic outlook. He’s also said that even after the Fed has begun to curtail the purchases, it could reverse course and step up its bond buying if it felt the economy needed more support.
Almost no one expects the Fed to announce that it will start reducing its bond purchases immediately. But it might specify what it means by a substantial improvement in the job market. Investors could then monitor the monthly employment report to see whether the job market is meeting the Fed’s benchmark for substantial improvement.
The statement is expected to repeat the Fed’s commitment to keep its key short-term interest rate at a record low near zero. The benchmark short-term rate has remained at that level since late 2008, after the financial crisis erupted.
In December, the Fed said for the first time that it would leave the short-term rate unchanged at least until the unemployment rate reaches 6.5 percent. The rate is now 7.6 percent. Many private economists don’t expect unemployment to reach 6.5 percent until mid-2015.
-- ECONOMIC OUTLOOK
This is one of four meetings each year when the central bank updates its economic outlook, based on the individual forecasts of 19 Fed officials. If the Fed downgrades its outlook for growth and employment, it would suggest that officials think a still-weak economy continues to need substantial Fed stimulus. Investors would likely conclude that the Fed won’t scale back its bond purchases soon.
If, on the other hand, the Fed upgrades its outlook, it would be seen as a signal that it thinks the economy can now manage with less stimulus. The likely conclusion: That the Fed is moving closer to reducing its bond purchases.
That conclusion would upset some investors because it could lead to higher interest rates and lower stock prices. Yet it would amount to a vote of confidence in the U.S. economy.
In its last forecast in March, the Fed predicted that the economy would grow as little as 2.3 percent this year -- not enough to quickly reduce unemployment -- or as high as 2.8 percent. For 2014, it envisioned growth ranging from 2.9 percent to 3.4 percent.
It forecast that the unemployment rate would fall between 7.3 percent and 7.5 percent by the end of this year. By the end of 2014, the Fed envisioned the rate between 6.7 percent and 7 percent.
-- BERNANKE NEWS CONFERENCE
The day’s major event is Bernanke’s session with reporters. And the question is how far he’ll go to define a substantial improvement in the job market and to clarify the Fed’s timetable for slowing its bond purchases.
However he does it, the chairman will surely address the uncertainty created by the mixed messages he sent in his congressional testimony last month.
Bernanke almost certainly won’t say precisely when the Fed will start to slow its bond purchases. Economists generally think the scaling back could begin in September or, if not then, by December. Bernanke might hint as much, without explicitly saying so, in his news conference.
He may also try to ease investors’ fears by spelling out the kind of improvement in the job market the Fed will want to see before it starts trimming its bond purchases. And he’ll also likely stress the Fed’s continued flexibility even after it starts to pull back: It could decide to taper or expand the bond purchases -- or any other Fed program -- at any time depending on the economy’s health.
During his news conference, Bernanke will likely be asked to address the widespread assumption that he will leave the Fed when his second four-year term ends in January. President Barack Obama, in an interview with PBS that aired Monday, hinted that Bernanke will be stepping down. Janet Yellen, the Fed’s vice chair, is considered the front-runner to succeed him.
-- INVESTORS’ REACTION
Global financial markets are hoping for a signal that no pullback in the Fed’s economic support is imminent. If Bernanke manages to reassure them, the market reaction may be muted.
If, on the other hand, the Fed’s message is that it will start scaling back its stimulus as soon as September, investors might send stock and bond prices down and interest rates up.
Even if the Fed makes clear it will delay any pullback in support for at least a few months, the stock market might still drop. Stocks have rallied the past two days on hopes that the Fed will signal that it won’t reduce its stimulus until it’s sure the economy can handle it.
And investors have a long history of buying on the rumor and selling on the news.
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