Fed seen maintaining bond-buying, but divisions remain

Jan 30 2013, 12:02 IST
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SummaryThe policy statement issued by the U.S. central bank at the end of the meeting.

The Federal Reserve is expected to keep monetary policy on a steady path when it concludes a two-day meeting on Wednesday, though behind the scenes intensive debate continues over when the controversial bond-buying program should be curtailed.

The policy statement issued by the U.S. central bank at the end of the meeting will likely be only slightly rephrased from its meeting in December to reflect minor changes in the economic outlook, notably reduced risks from financial turmoil in Europe

Otherwise, economists say the policy-setting Federal Open Market Committee will maintain asset buying at $85 billion a month and retain the commitment to hold interest rates near zero percent until the unemployment rate falls to 6.5 percent, provided inflation does not threaten to breach 2.5 percent.

The Fed has taken unprecedented steps to try to spark a stronger economic recovery and drive down unemployment. It has kept overnight interest rates near zero since late 2008 and has launched three rounds of bond purchases, known as quantitative easing, to drive other borrowing costs down.

Recent data has been consistent with a gradual improvement in the economy, although the government's monthly labor market report, to be released on Friday, is expected to show the jobless rate remained stuck at 7.8 percent in January.

"The FOMC is expected to tweak the description of the state of the economy but announce no new policy measures," Morgan Stanley economist David Greenlaw wrote in a note to clients.

The Fed statement is expected at around 2:15 p.m. (1915 GMT).

QE THRESHOLDS?

To get a sense of what likely will be a lively discussion on how the Federal Reserve should communicate about the future of its current securities purchase program, dubbed QE3, investors will have to wait three weeks for the release of the meeting's minutes.

Critics warn that the bond buying, which has tripled the Fed's balance sheet to almost $3 trillion since 2008, might stoke inflation or trigger an asset bubble that could tip the economy back into recession when it bursts.

Some policymakers advocate adopting set levels of certain economic variables that would signal when the central bank thinks the time is ripe to stop the purchases, much like the "thresholds" it has adopted to help guide the market's understanding of when interest rates are finally likely to rise.

An unexpected halt in the buying, which accounts for a considerable part of the demand for U.S. Treasury debt, could send long-term borrowing costs shooting up and

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