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MENAFN - The Peninsula - 17/06/2013
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(MENAFN - The Peninsula) The Federal Reserve's policy board meets tomorrow to review the economy and its stimulus program, and markets are looking for one thing: clarity.

After weeks of tumultuous stock market volatility and a sharp fall in bond prices, bankers, investors and anyone else with a vested interest are waiting to hear: Is the Fed really about to reel in its quantitative easing programme?

If so, could that be within months? Or will the US central bank wait for stronger economic growth to take that step?

The markets eagerly await any meeting of the Federal Open Market Committee, which sets the benchmark US dollar interest rate and, at the moment, continues to hold long-term rates down with its 85bn-a-month QE bond buying programme.

But much more rides on this FOMC meeting tomorrow and on Wednesday, because over the past month billions of dollars have been bet on an aggressive interpretation of comments by Fed chief Ben Bernanke that the Fed is about to turn the corner on five years of stimulus.

The belief that it will start tapering its bond purchases within months has sent bond prices plummeting and interest rates shooting up, and that, in turn, has pulled stocks lower, after they reached new records fuelled by the Fed's easy money policy.

Yet US economic growth slowed slightly in the spring and remains at risk to slower growth around the world, and with the government slashing spending, Fed stimulus is still needed, economists say.

The Fed's guideposts, unemployment and inflation, remain far off their target for a "normalized" fiscal policy. The unemployment rate is hovering at 7.6 percent - the target is 6.5 percent - and inflation is well below the two percent level the FOMC sees would be healthy.

Most analysts say that means that the FOMC is likely to stay the course in this meeting.

But how Bernanke hones his hints on future policy in a post-meeting press conference on Wednesday will be key.

"We do not expect Mr Bernanke to yet show confidence that the time to taper QE is near," said Carl Riccadonna at Deutsche Bank. "But the most important aspect of his media Q&A will be whether he signals that a second-half taper remains plausible."

The bond market has decided. The yield on the 10-year Treasury bond shot up from 1.63 percent at the beginning of May to 2.23 percent in the past week, and the 30-year jumped from 2.82 percent to 3.38 percent.

Partly behind that were the seeming at-odds comments by Bernanke to Congress on the issue on May 22.

He first warned that tightening monetary policy now could stall the US recovery.

 






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