Federal Reserve to take away the punch bowl

Sun Oct 26, 2014 9:50am EDT
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By Mike Peacock

LONDON (Reuters) - Unless it springs a major surprise, the U.S. Federal Reserve will call time this week on its program of government bond purchases, which at one point was pumping $85 billion a month into financial markets and the economy.

James Bullard, who heads the St. Louis Fed, has suggested that sticking with bond purchases for a few more months would give policymakers time to assess a deteriorating inflation outlook.

That helped markets to calm from a violent sell-off 10 days ago but economists expect the Fed to turn off its money taps on schedule on Wednesday, while giving accompanying assurances that it will respond if a global downturn threatens its economy.

"We remain optimistic that the recent upshift from 2 percent to 3 percent growth will be sustained," economists at Bank of America Merrill Lynch said in a note.

It may well be that the Fed keeps U.S. interest rates virtually at zero for longer given tumbling energy prices and an absence of wage growth. Investors have already pushed expectations for an initial rate rise back several months to late next year.

Global concerns are centered on the extent of China's slowdown and the malaise in the euro zone, over which the specter of deflation still hovers.

Results of stress tests on European banks, announced on Sunday, showed 25 banks had failed as of the end of 2013 but most have since repaired their finances.

The European Central Bank has staked its reputation on this exercise, hoping it will draw a line under years of financial and economic turmoil. But whether it leads to a resurgence of bank lending is uncertain given the euro zone's economic doldrums.   Continued...

The sun rises to the east of the U.S. Federal Reserve building in Washington, July 31, 2013.  REUTERS/Jonathan Ernst