federal reserve

Should Fed continue tapering, as expected?

Federal Reserve policymakers are expected to stick to the plan when they meet this week: Trim the bond-buying stimulus program that was created to stimulate the economy and keep interest rates low. But does that mean they should?

When the Fed announced last month that it would slow the pace of its monthly Treasury and mortgage bond purchases by $10 billion, to $75 billion per month, the economy had just added more than 200,000 jobs in November. There was no question that the Fed would keep tapering the program again at the next Federal Open Market Committee meeting.

That was until the recent dismal employment report raised questions about the health of the economy as it showed a mere 74,000 jobs were added in December.

Many economists say the latest report won't stop the Fed from tapering. The FOMC meets Tuesday and Wednesday, and issues its monetary policy announcement Wednesday afternoon.

"One point does not make a trend," says David Nice, associate economist for Mesirow Financial in Chicago. "(The latest jobs report) is definitely not what the Fed wanted to see, but we are forecasting a stronger economy in 2014 and we expect that forecast to remain in place."

Like several other economists, Nice expects the Fed to reduce bond purchases this week by another $10 billion, and an additional $10 billion each time the FOMC meets this year.

Still, some say the economy may not be ready for a second round of tapering yet.

"If I was a prudent Fed manager I would want to wait one more meeting, when this winter weather passes, to see if the recent softness is simply weather-related or something else," says Lance Roberts, chief executive officer of STA Wealth Management. "The broad composite of economic data suggests that the economy got weaker in the last two quarters of 2013, not actually stronger."

This will be Fed Chairman Ben Bernanke's last meeting before Janet Yellen takes over as leader of the Federal Reserve. It wouldn't hurt for Fed members to put the tapering plan on hold until she is in charge, Roberts adds.

Dean Baker, co-director of the Center for Economic and Policy Research in Washington, says he doesn't rule out the possibility that the Fed will hold off on tapering for now.

"They will get a GDP report that week and then the jobs report the following week," he says. "I can't see anything to be gained by rushing ahead with another taper."

Whether or not the Fed sticks to the plan, only one thing is certain at this point: The Fed will keep its main interest rate, the federal funds rate, near zero percent until at least next year. The rest is anyone's guess.


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