Fed Seen Tapering QE in $10 Billion Steps in Next Seven Meetings (Dec 2013)

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Source: Bloomberg – Fed Seen Tapering QE in $10 Billion Steps in Next Seven Meetings

Notable excerpts:

The Federal Reserve is likely to reduce its bond purchases in $10 billion increments over the next seven meetings before ending the program in December 2014, economists said.

The median forecast in a Bloomberg survey of 41 economists matches the $10 billion reduction announced yesterday as the Fed began to unwind the unprecedented stimulus that has defined Ben S. Bernanke’s chairmanship.

The Federal Open Market Committee said in a statement it will slow buying “in further measured steps at future meetings” if the economy improves as forecast. The Fed may taper its buying by about $10 billion per gathering, Bernanke said at a press conference in Washington.

“We’re going to take further modest steps subsequently, so that would be the general range,” Bernanke said. “We could stop purchases if the economy disappoints, we could pick them up somewhat if the economy is stronger.”

Such predictable increments would extend Bernanke’s push toward greater transparency and openness at the Fed, said Dana Saporta, an economist at Credit Suisse Group AG in New York.

“Doing this would avoid the drama of having to come to a consensus at each meeting,” Saporta said. “It may have been difficult enough to agree on the timing, size and composition of the first taper, so maybe no one has the appetite to do that on an ongoing basis.”

Bernanke’s second four-year term ends Jan. 31, and Vice Chairman Janet Yellen is awaiting Senate confirmation to succeed him.

‘Modest Steps’

The Fed coupled its decision to taper bond purchases with a stronger commitment to keep its benchmark interest rate low. Bernanke said the decision was intended to “keep the level of accommodation the same overall.”

Unemployment fell to a five-year low of 7 percent in November as employers added 203,000 workers to payrolls. Inflation measured by the personal consumption expenditures index was 0.7 percent in October and has remained below the Fed’s 2 percent objective for almost a year and a half.

The Fed’s balance sheet rose to a record $4.01 trillion as of yesterday, up from $2.82 trillion when it began the third round of purchases. The FOMC began QE3, as the program is known, in September 2012 with monthly purchases of $40 billion in mortgage bonds and added $45 billion in Treasury purchases starting in December 2012.

The balance sheet will expand to about $4.4 trillion by the time the program ends, according to median estimates in the survey. Economists forecast purchases in the the third round eventually will reach $800 billion in mortgage bonds and $789 billion in Treasuries.

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