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 chair should
confirm the central bank's plan to wind down its purchases of
Treasuries and mortgage-backed securities by year-end — a sign of
its confidence the economy is gaining traction.
The reduction likely to be announced at the end of the Fed's two-day
meeting would bring the total monthly purchases down to $45 billion,
split between $25 billion of Treasuries and $20 billion of
mortgage-backed securities.
But analysts expect little more out of the session as the Fed enters
what may be a sort of holding pattern as it transitions from an era
of crisis response to one of more normal monetary policy.
The meeting "will probably be a quiet one," with the reduction in
purchases "a foregone conclusion," and no fresh economic forecasts
from the members of the Fed's policy-making committee, said Goldman
Sachs senior economist Kris Dawsey.
A statement outlining the policy decision and the Fed's view of the
economy will be issued at 2 p.m. EDT.
Little or no change is expected in the Fed's guidance on its key
overnight interest rate, which it has kept near zero since the
depths of the financial crisis in December 2008.
The Fed changed its guidance in March when it dropped language that
said the target rate would not be increased until the unemployment
rate fell to at least 6.5 percent.
Unemployment has been steadily approaching that threshold, and now
stands at 6.7 percent. But with little sign of inflation, Yellen has
said she feels there is still ample "slack" in the economy and a
need to keep rates low to continue to support economic growth.
During an April 16 speech in New York, she said the United States
may still be more than two years away from what the Fed now regards
as the "longer-run normal unemployment rate" of between 5.2 percent
and 5.6 percent.
"Thus far in the recovery and to this day, there is little question
that the economy has remained far from maximum employment," she
said.
The last Fed statement said rates would likely remain near zero "for
a considerable time after the asset purchase program ends."
Investors have construed that to mean a rate increase is not likely
until the middle of next year. That, however, will depend on the
performance of an economy that is expanding, but not generating much
upward pressure on wages and prices.
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With inflation well below the central bank's 2 percent objective,
"We continue to see the Fed erring on the side of caution and moving
on the policy rate later rather than sooner," Millan Mulraine,
deputy chief economist at TD Securities in New York, wrote in a
preview of the Fed meeting.
"Indeed, the elevated level of economic slack, both in the labor
market and other sectors of the economy, will ensure that wage
pressures stay weak and pricing power among firms remains
contained," Mulraine said.
Data on gross domestic product for the first quarter will be
released on Wednesday morning. Analysts expect a poor headline
result, largely because of an unusually snowy winter that depressed
economic activity.
But the underlying trend is much stronger, said Ben Herzon, senior
economist with consulting firm Macroeconomic Advisers.
Both the harsh winter and a slowdown in the accumulation of business
inventories will produce an annualized GDP growth reading of about 1
percent for the first quarter, he said. But recent data has already
shown the economy is bouncing back.
"The economy is continuing to progress," Herzon said. "Not
blockbuster, but decent ... The pace of GDP growth is sufficient to
keep the unemployment rate moving down."
(Reporting by Howard Schneider; editing by Ken Wills)
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