Taper Uncertainty in Focus

The Federal Reserve’s much-anticipated two-day policy meeting is set to commence later today, amidst ongoing uncertainty regarding the future of the central bank’s bond-buying program.

Currently, the Fed is purchasing $85 billion per month in Treasury securities and mortgage debt as part of a monetary policy strategy known as quantitative easing, aimed at boosting economic activity.

The central bank’s Open Market Committee will meet in Washington on Tuesday and Wednesday to conduct its final meeting of the year, marking the end of Chairman Ben Bernanke’s tenure.

Many in the market speculate that the Fed may announce plans to taper its stimulus program, following recent improvements in the labor market and last week’s agreement on a two-year budget deal in the U.S.

Minutes from the Fed’s October meeting suggested that the central bank could begin to reduce its monthly asset purchases if the economy continues on an upward trajectory.

Some investors anticipate that the central bank will lower its monthly purchases of Treasuries from $45 billion to $35 billion while maintaining mortgage-bond purchases at $40 billion.

Analysts at Societe Generale noted earlier today that while they lean towards tapering being announced in January, they believe the economic conditions already justify a decision to proceed now.

The Fed will release updated economic projections at 2 p.m. EST on Wednesday, followed by Chairman Bernanke’s press conference at 2:30 p.m.

In his final address as Fed chair, Bernanke is expected to emphasize that interest rates will remain low for an extended period even after the conclusion of the bond-buying program.

Federal Reserve Bank of Richmond President Jeffrey Lacker, a non-voting member of the FOMC, expressed last week that he expects tapering to be a topic of discussion during this month’s meeting. Similarly, Dallas Fed President Richard Fisher, also a non-voting member, stated that the central bank should commence reducing its bond purchases at the earliest opportunity.

Conversely, St. Louis Fed President James Bullard, a voting member of the FOMC, argued that any tapering should be contingent on forthcoming data, especially since inflation remains significantly below the Fed’s 2% target.