Fed likely to hold policy this week, extend QE into 2014
(Reuters) – 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.”