HILSENRATH: One Option Gaining Support Is The Fed Will Reduce Bond Purchases By $US10 Billion

This morning’s job’s report, the last job’s report before the FOMC meeting, has complicated the question of whether the Fed will taper later this month.

The taper refers to the Fed slowing down its $US85 billion asset purchase program that is intended to lower long-term interest rates.

Now, Jon Hilsenrath, whom Stephen Roach joked was the real Fed chairman, writes that today’s jobs report, concerns around Syria, and the Washington debt debate are also likely to complicate the decision.

In his latest piece, Hilsenrath writes that consensus is building around the idea that the Fed will lower its bond buying program by $US10 billion to $US85 billion a month.

“One option that has gained support among some Fed officials in recent weeks: Reduce their monthly bond purchases by a small amount, say $US10 billion to $US75 billion, and signal as loudly as possible the next step will depend on more evidence the job market is continuing to improve and inflation is moving back toward 2% from its current low levels.”

Hilsenrath also reiterates that the commitment that is most important to the Fed, is their promise to keep short-term interest rates low until the jobless rate falls to 6.5%:

“Most troubling to top Fed officials is the risk that investors will see a cut in bond purchases as a sign they’ll start raising short-term interest rates, which have been pinned near zero since late 2008. The Fed has said short-term rates will stay low at least until the jobless rate falls to 6.5% and possibly much longer.

“Fed officials see that commitment as a more powerful tool than the bond-buying program in their efforts to hold down long-term interest rates to encourage borrowing, spending, investing and growth and they want to reinforce it.

“The Fed’s post-meeting policy statement and Mr. Bernanke, in his following press conference, are likely to emphasise that short-term interest rates will remain near zero until the jobless rate falls much further and that more reductions in bond purchases aren’t set in stone.”

The Fed’s job just got a little more complicated.

Read the entire piece here ยป

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