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From Real Time Economics:
The Federal Reserve concludes its policy meeting later today, and it’s a nail-biter. Fed officials are likely to emphasize they’re moving slowly and carefully even if they do decide to start pulling back on their signature bond-buying program, and will also seek to reassure investors that short-term interest rates will stay low well into the future. But the outcome is uncertain on several fronts, so here’s a rundown of what to keep an eye on when the statement comes out at 2 p.m.
Programming notes: The Fed is also releasing at 2 p.m. updated economic projections that will for the first time show officials’ forecasts for 2016. Fed Chairman Ben Bernanke will hold a press conference at 2:30 p.m.
1) To taper or not to taper, that’s the big question. Fed officials will decide whether to start winding down an $85 billion-a-month bond-buying program. Many officials were still undecided after seeing the so-so August jobs report earlier this month. Other economic data have come in pretty mixed since the Fed’s July meeting. Though the labor market has improved over the past year, growth is slow and inflation below their 2% objective. Many analysts predict the Fed will reduce its monthly bond purchases by a small amount. After months of market volatility reflecting uncertainty about the program’s fate, officials want to avoid surprises. So they could decide to follow the market’s lead and pull back a little, though there are still likely to be people in the room arguing to wait a bit longer for evidence of a stronger economy.2) Size and Timing. If Fed officials decide to trim their monthly bond purchases, they must decide by how much. For Fed officials, it is the message that matters. Some Fed officials have floated the idea of making a small reduction — say $10 billion — to signal they are moving tentatively and cautiously. A reduction of $20 billion would be bigger than many investors are expecting and a sign the Fed has become slightly more confident about the economy. Size is one way to signal caution. Timing is another. The Fed could tip its hand about the sequencing of future reductions. For instance officials could hint that a quick second reduction at their late October meeting is unlikely because they want time to assess the economy’s performance before taking the next step. Terms like “patience” could be signals that they will move slowly and carefully. Several officials have used the term lately, and it came up in the minutes to their last policy meeting: “A few members emphasized the importance of being patient and evaluating additional information on the economy before deciding on any changes to the pace of asset purchases.”...MORE
