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Fed strategy: Taper or bust

By Mark Hamrick ·
Monday, March 17, 2014
Posted: 6 am ET

This week, Janet Yellen leads her first Federal Reserve meeting and holds her first news conference since becoming the central bank's new chair.

Monetary policy under Yellen is expected to virtually mimic that of predecessor Ben Bernanke, at least in the near-term. It's a bit like the classic rock hit "Won't Get Fooled Again" by The Who, specifically the lyrics, "Meet the new boss. Same as the old boss." That continuity should be welcom by the financial markets, which don't tend to digest change well.

A busy week

Here's what we have on the economic calendar this week:

  • The Fed reports on February industrial production, Monday at 9:15 a.m. (all times Eastern).
  • The Commerce Department reports on February housing starts, Tuesday at 8:30 a.m.
  • The Labor Department reports on the February Consumer Price Index, Tuesday at 8:30 a.m.
  • The Fed releases a statement after its policy meeting and Yellen holds a news conference, Wednesday afternoon.
  • The National Association of Realtors releases February existing home sales, Thursday at 10 a.m.
  • The Conference Board releases the index of leading economic indicators, Friday at 10 a.m.

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The new Fed boss gets down to business

Janet Yellen's first policy meeting as Federal Reserve chief is likely to feature a lot of talk about the weather.


On the Fed's agenda

The Federal Reserve's meeting is expected to result in another decision to reduce monthly asset purchases -- a wind-down that's widely become known as "tapering."

Specifically, the pace of bond-buying is expected to be cut by another $10 billion to $55 billion. The asset purchases are on track to end this year.

Many experts believe the Fed's first boost in short-term interest rates will come next year.

"From their perspective, I think they're going to try to keep in that mid-2015 (range). Right now, they don’t want to rock the apple cart," says Diane Swonk, chief economist with Mesirow Financial. But she thinks there's a chance the Fed might not be able to raise rates quite so soon, particularly if the recovery stumbles and inflation remains remarkably low.

Economy's temperature?

With winter presumably on its last legs, the economy is expected to shake off its recent chill. There was a reassuring sign last week when the government reported a better-than-expected 0.3 percent increase in retail sales.

"The spring recovery is on the way," writes economist Scott Anderson with Bank of the West.

For many, the arrival of spring will be more welcome than usual. That's especially true for businesses that have been seeing diminished sales because of harsh winter weather.

Some economists think growth for the first quarter will come in below 2 percent. The prediction from Chris Christopher, director of consumer economics for IHS Global Insight, is for gross domestic product growth of just 1.4 percent in the first three months of the year.

"If we'd had regular winter weather, that would've been 1.6 percent," he says.

Housing complexities

Housing, too, has been affected by the bad weather, among other negative factors. They include "tight credit, eroding affordability conditions and limited inventory," says Walter Molony, a spokesman for the National Association of Realtors.

As we move into the springtime, "we'll probably see a bounce-back," Molony says. For all of 2014, he looks for sales of previously owned homes to be flat to down 0.2 percent this year.

"Prices, on the other hand, are likely to grow 5 (percent) to 6 percent because of ongoing shortages," Molony notes.

Of course, local conditions vary, depending upon the market. There's that "location, location, location" thing.

This week in business history

On March 18, 1852, Wells Fargo was founded. It rapidly became synonymous with one of the leading forms of transportation: the stage coach. The name has become iconic from movies about the Old West.

Before the automobile, a stage coach could carry some combination of passengers and freight, including gold dust and business papers. In 1869, completion of the transcontinental railroad was the beginning of the end for the stage coach business. But Wells Fargo lives on as one of the nation's largest banks.

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