Fed likely to OK tapering at meeting

US - Is the Federal Reserve ready to put the Great Recession behind it? Is the United States economy prepared for it?

The markets think so, as the Fed's policy board prepares to meet tomorrow and on Wednesday to decide on a momentous step: whether to begin cutting back its stimulus for the economy, US$85 billion (S$108 billion) a month pumped in via bond purchases to fuel the engine.

Four months after Fed chairman Ben Bernanke first suggested that the central bank could start to taper its stimulus programme, called quantitative easing, sometime this year, most expectations are that the Federal Open Market Committee (FOMC) will take the step.

And with Mr Bernanke expected to step down at the end of January, many believe he needs to set the policy path now, rather than having it delayed for months until his successor settles into the job.

The prospect of less easy money from the Fed has already taken US stocks down from their all-time highs, and sent market interest rates climbing sharply. The anticipation has also wreaked havoc in emerging markets.

And although that has drawn warnings to the Fed from around the world to not act too precipitously, analysts say the only questions surrounding the tapering are when, and how fast.

The minutes of the end-July FOMC meeting showed that several members wanted to go ahead with the tapering, while others counselled "the importance of being patient".

Economic data has backed both views. At the end of last month the official estimate of US economic growth in the second quarter was raised to a solid 2.5 per cent.

The August job report put the unemployment rate at 7.3 per cent, compared with 8.1 per cent a year earlier, and data on corporate and government layoffs has improved steadily.

But the report also showed a significant slowdown in new job generation for the June-August period. Gains in the unemployment rate were largely from the number of people dropping out of the job market altogether.

Most analysts say there is not enough economic bad news for Mr Bernanke to reverse course.

But the FOMC could cut its bond purchases by a small amount - US$5-US$20 billion out of the US$85-billion total - and then hold off on more cuts to see where the economy goes, analysts say.

Or it could put off the decision to one of the FOMC's two remaining meetings this year.

"The Fed will likely hold off on tapering at next week's meeting and move in December," said economists at IHS Global Insight in a report on Friday, taking a minority view.

"The job market is simply too uncertain and there are risks on the horizon from Syria and congressional fiscal fights."

myp@sph.com.sg

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