Investors Anxiously Await Fed's Latest Decision on Stimulus

federal reserve chairman ben bernanke stimulus bond buying investors stock markets
Alex Wong/Getty ImagesFederal Reserve Chairman Ben Bernanke
By Annalyn Kurtz and Hibah Yousuf

Ever since Federal Reserve Chairman Ben Bernanke noted last month that the central bank may start slowing its stimulus program in just a "few meetings," it's been a bumpy ride for financial markets.

Stocks have had some wild swings and the benchmark 10-year Treasury yield has ticked slightly higher. Much of the volatility is due to confusion about what exactly Bernanke meant by a "few."

Other Fed officials have since discussed the issue further but have hardly cleared it up, so CNNMoney asked economists and investment strategists for their predictions about what the Fed will do next.

Nearly two-thirds of the 39 people we surveyed said they don't think the Fed will slow its monthly asset purchases until at least December. Some even noted that the so-called "tapering" may not begin until 2014.

"Tapering talk seems premature," said Dorsey Farr, partner with the investment firm French Wolf & Farr.
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The rest of the economists and strategists thought the slowdown process would begin at either the September or October meetings. Nobody predicted that the Fed will make a change at its upcoming meeting, but Fed watchers are hoping for hints from Bernanke, who will speak at a press conference Wednesday afternoon.

"The markets don't like uncertainty," said Allen Sinai, chief global economist for Decision Economics. "The Federal Reserve should clarify the uncertainty as soon as possible -- which would be Wednesday."

The central bank's controversial stimulus program, known as quantitative easing, currently entails purchasing $45 billion in Treasuries and $40 billion of mortgage-backed securities each month. The goal is to lower long-term interest rates, thereby making it cheaper for consumers and businesses to borrow money.

It's hard to measure just how effective the program has been, but it seems low rates have helped the housing and stock markets over the past few years. On the other side of equation, low interest rates have also meant savers are getting measly returns on bonds and other conservative investments.

The Fed has said it's looking for "substantial improvement" in the job market before it starts to wind down stimulus. But what does "substantial" mean? That's anyone's guess. The Fed has yet to lay out any specific goalposts for QE3.

The unemployment rate is still relatively high, and it rose slightly to 7.6 percent in May. Meanwhile, the Fed's preferred measure of inflation is well below the central bank's goal, showing prices were up only 1.1 percent in the 12 months ending in April.

"When we look at the data, we see a labor market that isn't really accelerating and an inflation picture that is showing greater signs of deflationary pressures than inflationary pressure," said Thomas Simons, money market economist for Jefferies & Co. "We don't see a fundamental justification for a change in policy."

What's also unclear is just how gradually the Fed will curtail the program. Will it start winding down in $5 billion increments? $10 billion? $20 billion?

Fed watchers surveyed by CNNMoney predict that when the Fed first starts to reduce its monthly purchases, it will be to $65 billion a month: $30 billion in mortgage-backed securities and $35 billion in Treasuries.

The QE program is unlikely to come to a full stop until mid-2014, and actual tightening -- when the Fed starts to sell assets and raise short-term interest rates -- isn't expected until mid-2015. (The Fed has specifically said that it thinks rates should remain "exceptionally low" as long as the unemployment rate is above 6.5 percent.)

By then, we're likely to have a new Federal Reserve chair. Nearly all (92 percent) of the Fed watchers surveyed by CNNMoney predict Bernanke won't serve a third stint as chairman. His current term ends in January.

Instead, an overwhelming majority said they expected Janet Yellen, current vice chair of the Federal Reserve Board, to replace Bernanke.

"Janet Yellen is eminently qualified to be Fed chairman, she has a tremendous record of academic success and respect she's gained from her peers," Simons said. "Plus, she already has a ton of Fed experience."

The Federal Reserve will release its latest policy decision and new economic forecasts at 2 p.m. ET on Wednesday, to be followed by a 2:30 p.m. press conference with Bernanke.

More from CNNMoney

9 Numbers That'll Tell You How the Economy's Really Doing
See Gallery
Investors Anxiously Await Fed's Latest Decision on Stimulus
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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