Traverse City Record-Eagle

Business

September 20, 2013

Fed sparks a debate: When to reduce stimulus?

WASHINGTON (AP) — The Federal Reserve’s decision to postpone any pullback in its economic stimulus immediately ignited a debate: Was the Fed right or wrong to delay the inevitable?

Investors had anticipated a small cut in the Fed’s $85 billion in monthly bond purchases, which are intended to keep long-term borrowing rates low to encourage spending. A pullback would have signaled that the Fed felt the economy had shown steady improvement.

Was the Fed right to hold off? Here’s the case for slowing the purchases — and the case against it.

n THE CASE FOR SLOWING BOND PURCHASES

If not now, when? That’s what many economists were asking.

By not reducing its purchases as most investors and economists had expected, the Fed has heightened uncertainty about its future actions.

Back in June, it had all seemed clear: Chairman Ben Bernanke said the Fed planned to slow its purchases by year’s end as long as the economy improved. The Fed’s policymaking board reaffirmed that time frame at its July meeting. Borrowing rates rose in expectation that a pullback was near, with most economists forecasting that it would start in September.

Now, it isn’t even clear that any pullback will begin before next year. If the Fed thinks the economy hasn’t improved enough yet, there’s little reason to think its view will change soon. The Fed’s own forecasts foresee scant improvement until 2014.

Markets soared Wednesday in response to the Fed’s decision. By maintaining the pace of its bond buying, the Fed will aim to keep borrowing rates as low as possible. That’s seen as a recipe for higher bond and stock prices.

But “we wonder whether the longer-lasting reaction will be increased volatility ... as the Fed’s communications become even more confused,” says Paul Ashworth, an economist at Capital Economics.

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