Fed set to end one crisis chapter even as global risks rise

Wed Oct 29, 2014 1:24am EDT
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By Howard Schneider

WASHINGTON (Reuters) - The U.S. Federal Reserve on Wednesday is expected to shutter its bond-buying program, closing one controversial chapter in its crisis response even as it struggles to manage a full return to normal monetary policy.

The Fed is likely to announce at the end of a two-day meeting that it will no longer add to its holdings of Treasury bonds and mortgage-backed securities, halting the final $15 billion in monthly purchases under a program that at its peak pumped $85 billion a month into the financial system.

An important symbolic step, the end of the purchases still leaves the Fed far from a normal posture. Its balance sheet has swollen to more than $4 trillion, interest rates remain at zero, and, if anything, recent events have increased the risk the U.S. central bank may need to keep propping up the economy for longer than had been expected just a few weeks ago.

The statement the Fed will issue at 2 p.m. (1800 GMT) will be read carefully for signs of how weak inflation, ebbing global growth and recent financial market volatility have influenced U.S. policymakers. There is no news conference scheduled after the meeting and no fresh economic forecasts from Fed officials.

"They are worried about the economy, the global one," and are likely to leave much of their language intact rather than signal progress towards a rate hike, Morgan Stanley analyst Vincent Reinhart wrote in a preview of the meeting.

Attention will focus on whether the Fed's statement continues to refer to "significant" slack in the U.S. labor market, and whether it retains language indicating rates will remain low for a "considerable time," as most economists expect.

Paul Edelstein, director of financial economics at IHS Global Insight, said the Fed may also need to acknowledge the inflation outlook is weakening.

"They have been kind of wrong about inflation lately," Edelstein said. "It would behoove them to do something - signal to markets they are not going to tolerate inflation and inflation expectations persistently below 2 percent."   Continued...

The United States Federal Reserve Board building is shown in Washington October 28, 2014. REUTERS/Gary Cameron