The exact date of the first reduction in Fed stimulus has loomed over investors since Chairman Ben S. Bernanke said in June that the Fed would likely begin the process this year and end the program altogether when the unemployment rate hits 7 percent, which is expected to occur in mid-2014. The announcement ignited a sell-off in the markets, which have been spooked by the prospect of an upcoming pullback ever since.
Fed officials are divided over whether the economy is strong enough to support a slowdown in stimulus. Government data released Monday showed business investment plunged in July. New orders of durable goods dropped 7.3 percent, with the bulk of the decline in the volatile transportation sector. Analysts said that core measures of investment were also weak.
“Such activity points to a defensive mentality on capital spending, doing only what is necessary to maintain the current level of growth but not operating with the type of aggressive entrepreneurial mentality that often underlies strong periods of U.S. economic performance,” said Cliff Waldman, senior economist at the Manufacturers Alliance for Productivity and Innovation, a trade group.
The disappointing data help make the case for Fed officials who want more information about the state of the economy before the central bank pulls back its bond purchases. The program is intended to tamp down long-term interest rates and boost demand among consumers and businesses. Minutes of the Fed’s latest policy committee meeting indicated that some members advocated patience for the recovery.
But other members noted that the unemployment rate has fallen about half a percentage point since the Fed began its latest round of bond purchases. The economy has managed to grow despite federal spending cuts and tax increases imposed at the beginning of the year. They also worry that the Fed’s burgeoning balance sheet could destabilize the financial system in the future and sow the seeds of inflation.
“While the macroeconomic data will be the center of attention for September tapering, Fed officials are going to look for sustainability of progress rather than dramatic improvements,” said Shushanik Papanyan, an economist at BBVA Compass.
The Kansas City Federal Reserve bank held a major academic conference last week that included a paper by economists Arvind Krishnamurthy and Annette Vissing-Jorgensen that found the central bank’s purchases of Treasury bonds have done little to help the recovery gain traction. The report said that the Fed’s purchases of mortgage-backed securities, however, was more effective.
The NABE survey showed 57 percent of economists believed current monetary policy was “about right,” about the same percentage as in a March poll. But half believed the Fed would begin to raise short-term interest rates in 2014 — ahead of Fed officials’ own projections.
In the central bank’s most recent forecast, 15 of the Fed’s top officials said they do not plan to raise interest rates until 2015. Only three projected a rate increase next year.
The Fed has tried to separate expectations for its bond-buying program from the path of short-term interest rates. Officials have said the Fed will not raise rates from near zero at least until the unemployment rate hits 6.5 percent or inflation reaches 2.5 percent.
While the NABE survey showed that about one-third of economists support that bar for unemployment, about as many think it should be broadened or replaced with other measures of labor market conditions. Fifteen percent said the target should be eliminated.
Economists were much more comfortable with the Fed’s inflation target, according to the NABE poll. About 70 percent believed that threshold should stand.