Insight: Withdrawal syndrome sparks anxiety for Fed

Sun Jun 16, 2013 7:06am EDT
 
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By Ann Saphir, Jonathan Spicer and Alister Bull

(Reuters) - When do you take the addict off the methadone?

That's essentially the dilemma facing the U.S. Federal Reserve's 19 policy makers when they meet in Washington this week.

Since the height of the financial crisis in 2008, the U.S. economy and everyone with a stake in it have become hooked on the massive amounts of stimulus injected by the U.S. central bank.

Now, though, consensus is building among policy makers that the time is nearing to adjust their $85 billion-a-month asset purchase program, dubbed quantitative easing, but divisions remain over just when to start reducing the dosage.

In recent weeks, even the program's most ardent supporters, including Chairman Ben Bernanke, have begun signaling a willingness to dial back the pace of bond buying before too much longer. Meanwhile, those who have never liked it insist the moment has arrived and worry the Fed's grip on markets is weakening the longer the program remains in full force.

"We haven't taken steps in the face of better data to scale it back. So I worry that the markets believe we don't have the capability or willingness to do that," Philadelphia Fed President Charles Plosser told Reuters in a recent interview.

Indeed, the question of the market's faith in the Fed has taken on added urgency in the weeks since Bernanke's May 22 comment that the Fed could reduce the pace of its quantitative easing in the "next few meetings" sparked a global bond and stock selloff that continues to reverberate.

It is a delicate balance Bernanke and his colleagues must now strike. Moving too soon risks jarring markets, sending interest rates higher and choking off credit to a sputtering recovery.   Continued...

 
Federal Reserve Board Chairman Ben Bernanke testifies before the Joint Economic Committee in Washington May 22, 2013. REUTERS/Gary Cameron