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 Overall signs of improvement in the U.S. economy suggest Fed
officials will stay on track to cut monthly purchases of Treasuries
and mortgage-backed securities by $5 billion each, bringing the
total of their monthly asset purchases to $65 billion.
The meeting is Bernanke's last before Vice Chair Janet Yellen moves
into the top spot.
Bernanke took the Fed far into uncharted territory during his eight
years on the job, building a $4 trillion balance sheet and keeping
interest rates near zero for more than five years to pull the
economy from its worst downturn in decades.
With those efforts beginning to pay off — and concerns growing over
possible harm from so much money printing — the Fed
announced plans last month to phase out the bond buying by late this
year unless the economy takes a decided turn for the worse.
It started by trimming its monthly purchases to $75 billion from $85
billion, and on Wednesday, the U.S. central bank is expected to
shave another $10 billion.
"It's clear the Fed wants to taper," said Eric Stein, portfolio
manager at Eaton Vance in Boston.
Even so, the Fed is nowhere near to making a decision to raise
rates. Policymakers are expected to stick to their promise to keep
rates near zero until well after the U.S. unemployment rate, now at
6.7 percent, falls to 6.5 percent. The Fed is set to announce its
decision at 2 p.m. EST.
A dismal employment report for December showing businesses added far
fewer jobs than expected raised some doubts about the Fed's
commitment to keep tapering its stimulus.
But largely upbeat data in recent weeks, from consumer spending and
confidence to industrial production, bolstered the view of an
improving economy, which forecasters estimate grew at an above-trend
annual rate of 3.2 percent in the fourth quarter after notching a
4.1 percent advance in the previous quarter.
The show of strength provides a welcome backdrop for Bernanke, who
steps down on Friday after an unusually tumultuous and highly
experimental stint atop the world's most influential central bank.
EMERGING DISTRACTIONS
Steep losses in emerging market assets over the past week led some
to question whether the Fed might put plans to trim its bond buying
on hold. Analysts said the prospect of less Fed stimulus had added
to other worries, from signs of slower growth in China to political
turmoil in countries from Turkey to Thailand, and helped spark
investors' flight.
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But on Wednesday, Turkey's central bank sharply raised its main
interest rates, stemming both a slide in the lira and fears about
cuts in U.S. monetary stimulus.
That move could make the Fed's decision to trim its bond buying even
easier, economists said.
"It would take a full-blown crisis that ensnares all (emerging
market economies) to have a material effect on the U.S. economy, and
I don't think that's what they see," said Roberto Perli, a former
Fed official who is now a Washington-based partner at economic
research firm Cornerstone Macro.
"Clearly emerging-market financial markets are in turmoil for
reasons that have little or nothing to do with the Fed likely
tapering again."
That is not to say the decision will be a slam dunk.
Dallas Federal Reserve Bank President Richard Fisher, who is a voter
on the central bank's policy-setting panel this year, has argued for
a more aggressive withdrawal of purchases.
On the other end of the spectrum, Minneapolis Fed President Narayana
Kocherlakota, also a voter, has argued for more, not less, stimulus,
and that view could translate into a dissent.
Still, the Fed puts a high premium on consensus, and Kocherlakota
may feel that presenting a united front on policy could be a
stabilizing force for financial markets, Eaton Vance's Stein said.
"I don't think it's completely pro forma," he added, "but I do think
the consensus of the committee is to taper, about in line with the
last meeting."
(Reporting by Ann Saphir and Jonathan Spicer;
editing by Tim Ahmann
and Jan Paschal)
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