Several Fed members helped steady stock markets in the days that followed by noting that any pullback in bond buying would hinge on the economy’s health, not a target date. Stocks have since regained most of their losses, in part because of encouraging data about the job market and corporate earnings.
Each month since late last year, the Fed has been buying $85 billion in Treasury and mortgage bonds. The bond purchases have kept long-term rates near record lows. Ultra-low rates encouraged more Americans to buy homes and cars, fueled economic growth and cheered the stock market.
Investors worried that once the Fed starts scaling back its bond buying, home loans would start to cost more, corporations would pay more to borrow and bond investors would be squeezed.
But steady job gains have raised the likelihood that the Fed will announce after its September meeting that it’s reducing its bond purchases.
Still, growth has been subpar. The economy grew at an annual rate of just 1.8 percent in the January-March quarter. Economists think growth stayed below a 2 percent annual rate in the April-June quarter. If so, it would mark a third straight quarter of weak growth.
Most think growth will pick up in the second half of the year but stay around 2 percent for the year.
The Fed’s forecasts are rosier: It predicts growth of 2.3 percent to 2.6 percent this year and more than 3 percent in 2014. It also expects unemployment to fall as low as 7.2 percent by the end of this year and as low as 6.5 percent by the end of 2014.
Many analysts think the Fed could begin slowing its bond purchases from $85 billion a month to around $65 billion in September and gradually shrink them before ending them by next summer. That would likely happen, though, only if the job market and the economy continued to strengthen. Bernanke has said the bond buying would end when the unemployment rate would be around 7 percent. It’s now 7.6 percent.
Even after it scales back its bond purchases, the Fed will still be providing considerable support to the economy. That’s because it plans to keep its investment holdings — now at a record $3.4 trillion — constant to avoid causing long-term rates to rise too quickly. The end of the bond program would mean only that the Fed’s balance sheet would no longer be growing.
The Fed has also said it plans to keep short-term rates at record lows at least until unemployment slides to 6.5 percent. And Bernanke has emphasized that 6.5 percent unemployment is a threshold, not a trigger: The Fed might decide to keep its benchmark short-term rate near zero even after unemployment falls that low.
The article Fed Members: More Job Gains Needed to Taper Bond Buying originally appeared on Fool.com and is written by Associated Press.
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