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 The Fed is likely to announce at the end of a two-day meeting that
it will no longer add to its holdings of Treasury bonds and
mortgage-backed securities, halting the final $15 billion in monthly
purchases under a program that at its peak pumped $85 billion a
month into the financial system.
An important symbolic step, the end of the purchases still leaves
the Fed far from a normal posture. Its balance sheet has swollen to
more than $4 trillion, interest rates remain at zero, and, if
anything, recent events have increased the risk the U.S. central
bank may need to keep propping up the economy for longer than had
been expected just a few weeks ago.
The statement the Fed will issue at 2 p.m. (1800 GMT) will be read
carefully for signs of how weak inflation, ebbing global growth and
recent financial market volatility have influenced U.S.
policymakers. There is no news conference scheduled after the
meeting and no fresh economic forecasts from Fed officials.
"They are worried about the economy, the global one," and are likely
to leave much of their language intact rather than signal progress
towards a rate hike, Morgan Stanley analyst Vincent Reinhart wrote
in a preview of the meeting.
Attention will focus on whether the Fed's statement continues to
refer to "significant" slack in the U.S. labor market, and whether
it retains language indicating rates will remain low for a
"considerable time," as most economists expect.
Paul Edelstein, director of financial economics at IHS Global
Insight, said the Fed may also need to acknowledge the inflation
outlook is weakening.
"They have been kind of wrong about inflation lately," Edelstein
said. "It would behoove them to do something - signal to markets
they are not going to tolerate inflation and inflation expectations
persistently below 2 percent."
Fed officials have largely stuck to forecasts that the U.S. economy
will grow around 3 percent this year, with inflation poised to move
gradually back to their 2 percent goal.
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However, slower-than-expected global growth and falling oil prices
have called that inflation outlook into question.
Investors have recently pushed their expectations for an initial
rate hike back to late next year as a result, although a number of
top Fed officials recently said they think the U.S. central bank is
still on track to bump up borrowing costs in mid-2015.
The Fed's third round of bond buying closes to mixed reviews.
Officials argue it helped hold down long-term interest rates,
keeping borrowing costs cheaper for companies and households. Others
maintain it did little more than prop up stock prices.
The end of the program won't immediately lead to a decline in the
Fed's bloated balance sheet.
For now, it plans to continue reinvesting the proceeds of securities
that mature, part of an effort to keep many aspects of its monetary
accommodation in place. As it stands, officials do not plan to allow
the Fed's balance sheet to decline until after interest rates begin
to rise.
(Reporting by Howard Schneider; Editing by Tim Ahmann and Paul
Simao)
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