Fed May Decide To Trim Stimulus Program At Meeting

Dec 16, 2013
Originally published on December 17, 2013 9:35 am

The Federal Reserve will have its last 2013 policy meeting this Tuesday and Wednesday.

Economists and investors are watching closely to see if the Fed will cut back, or taper, the gigantic bond purchase program that helped stimulate the economy.

Financial Times reporter Cardiff Garcia, joins Here & Now’s Jeremy Hobson to discuss his predictions for this final meeting.

Guest

Copyright 2018 NPR. To see more, visit http://www.npr.org/.

JEREMY HOBSON, HOST:

From NPR and WBUR Boston, I'm Jeremy Hobson. It's HERE AND NOW.

The Federal Reserve kicks off a two-day policy meeting tomorrow and many on Wall Street are on the edge of their seats waiting to see if this will be the meeting at which the Fed finally starts to end its extraordinary stimulus program. Cardiff Garcia is a reporter for the Financial Times. He's with us from New York as he is each Monday. Hi, Cardiff.

CARDIFF GARCIA: Hey, Jeremy.

HOBSON: So I guess the big question we have to ask first is, is the Fed going to end the taper, which is another way of saying it's going to stop this, or start to stop this massive bond buying program that's been propping up a lot of the economy recently and saying tapers, heads, and no tapers, tails, and you flip it. So I think it's important to keep in mind that the Fed is trying to let actual changes in the economy dictate what it decides to do here. So if you look at the indicators that the Fed follows, you'll see that, for example, some signs of labor market healing have taken place. The unemployment rate is down. The pace at which jobs are being created has increased somewhat this year relative to last year.

GARCIA: On the other hand, inflation is incredibly low. And it's not just - it's not that the economy is great. It's just that it's getting a little bit better. But it's made for a very, very difficult time for a lot of market participants to actually predict just what it is that the Fed's going to do in the next two days.

HOBSON: Well, and every time people think that the Fed is going to start tapering, it doesn't. And usually the explanation is just what you said; there's basically no inflation right now, and the labor market is still - we've still got an unemployment rate of seven percent.

GARCIA: That's right. And I think it's also important to keep in mind that earlier this year, Ben Bernanke suggested that the Fed might start to taper within the next few meetings. But the market misinterpreted his statements as saying that monetary policy overall wouldn't be as supportive as Bernanke wants it to be for the next few years. So, for example, he said we might taper, and then interest rates started going up.

Bernanke has spent the rest of the year essentially trying to convince the market that quantitative easing, which is what this program is called, is only one of the Fed's tools. And just because it starts to slow down the pace at which that particular tool supports the economy, it has other tools in its arsenal. One of those tools, for instance, being the Fed's communications policy, where the Fed essentially promises to keep interest rates low unless certain thresholds are met.

There's thresholds involved unemployment, and they involve inflation. And we're still not very close to those thresholds now. So he's trying to send a message to the economy that it's OK, for instance, for people to spend money, to borrow money, in some cases, to spend, for businesses to borrow money in order to hire people and to invest in, you know, machinery and equipment, and things like that.

And essentially he's trying to convince the economy that even - that no matter what happens with quantitative easing, it doesn't mean that monetary policy overall is going to be less, as he calls it, accommodative. But it's a very, very tricky message to get across, and part of the decision - part of what's involved in making the decision in the next couple of days is going to be whether or not there's enough confidence that the market has taken his lessons.

HOBSON: And I've also heard analysis that perhaps he wants to be the one to start the taper rather than allowing Janet Yellen, if she is indeed confirmed by the Senate, and they are likely to vote on her nomination to head the Fed this week, that Ben Bernanke wants to be the one start it. What about that?

GARCIA: That's a fascinating issue. And the changing of the guard does kind of complicate things, you know. It could be that Ben Bernanke wants to start it, and that way it sort of a - it sort of set, you know, it's almost like it sets the table for Janet Yellen to show up with a policy that's already begun.

HOBSON: Right.

GARCIA: If she's in favor of it. But it might also be the case that Janet Yellen wants to control the process from the beginning. There's honestly no way of knowing this. The only way to know that would be if you had, like, a, you know, a secret bug in a conversation between Ben Bernanke and Janet Yellen. But that sort of thing is just speculation. And so it's a fascinating issue, but it's one we're just going to have to wait to find out.

HOBSON: Cardiff Garcia of the Financial Times, thanks as always.

GARCIA: Thanks, Jeremy.

HOBSON: This is HERE AND NOW. Transcript provided by NPR, Copyright NPR.