Fed Seen Pressing Forward on Bond-Buying Pullback

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By Michael Flaherty

WASHINGTON -- The Federal Reserve looks certain to press forward with its plan to wind down its bond-buying stimulus, and could offer some vague clues on how much nearer it might be to finally raising interest rates.

The central bank is widely expected Wednesday to cut its monthly asset purchases to $25 billion from $35 billion, which would leave it on course to shutter the program this fall.

With little drama expected from the decision, and no fresh economic projections and no news conference to guide investors, financial markets will be left to scour the Fed's announcement for any hint on whether officials are growing more anxious to start to reverse their monetary accommodation.

The Fed has kept overnight interest rates near zero since December 2008 and has more than quadrupled its balance sheet to $4.4 trillion through a series of bond purchase programs.

However, with unemployment dropping and inflation firming, the Fed could suggest that the days of this monetary largesse are increasingly numbered. A report on Wednesday is expected to show the U.S. economy grew at a healthy 3 percent annual clip in the second quarter.

"It is possible that the Fed will begin to alter its view on how much slack remains in the labor market," Paul Dales, of Capital Economics, said in a research note.

After its last meeting six weeks ago, the Fed said unemployment "remains elevated." Since then, the jobless rate has fallen to a near six-year low of 6.1 percent.

JPMorgan (JPM) economist Michael Feroli said in a research note that the central bank could modify the language to say "somewhat elevated." Such a change would allow the Fed "a more gradual pivot in communications toward recognizing they are making progress toward their mandate," he said.

To a good degree, the health of the labor market holds the key to the Fed's decision on rates.

Fed Chair Janet Yellen believes there is more slack in the jobs market than the unemployment rate alone would suggest, but she warned earlier this month that a rate hike could come "sooner and be more rapid than currently envisioned" if labor markets continue to improve more quickly than anticipated.

After a stronger-than-expected reading on employment early this month, the median forecast of economists polled by Reuters put the first increase in rates in the second quarter of next year. Previously, it had been the third.

The forecast is in line with the prediction offered by interest-rate futures, which imply an increase in June 2015.

While less likely, officials could also acknowledge the modest uptick in U.S. prices, which has put inflation closer to the central bank's 2 percent target.

But economists expect the Fed to hold fast to its guidance that a "considerable time" will elapse between the end of its bond buying and its first rate hike.

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Fed Seen Pressing Forward on Bond-Buying Pullback
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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