US- Fed message muddled as taper meets slow growth

(MENAFN- Khaleej Times) Federal Reserve Chairman Ben S. Bernanke and his colleagues meeting next week are poised to take two steps that appear inconsistent. They will probably lower their estimates for growth for this year and next for the third consecutive time. Simultaneously, they are forecast to start scaling back the $85 billion in monthly bond purchases they have been relying on to stoke the recovery. What's more, annual inflation has been running at least a half percentage point below the Fed's goal since December. And while the unemployment rate, at 7.3 per cent in August, is falling, that's mainly because some Americans are leaving the labor force. "As a central bank, you are lowering your growth forecast, inflation is running low, and hiring is slowing and you are going to taper your asset purchases?" said Julia Coronado, chief economist for North America at BNP Paribas in New York and a former member of the Federal Reserve Board's forecasting staff. "That is a communications challenge." Borrowing costs increased on the mere mention at Bernanke's last press conference, following the June policy meeting, of a tapering of bond purchases sometime this year. The yield on the US 10-year note reached a 12-month high of 2.99 per cent on September 5, compared with 2.19 per cent on June 18, the day before Bernanke's remarks. One way to lean against rising borrowing costs would be for Fed officials to expand on their guidance for the short-term interest rate, said Dominic Konstam, head of global interest-rate research at Deutsche Bank in New York. Policy makers have pledged they won't consider raising the federal funds rate, now near zero, as long as unemployment is 6.5 per cent or higher.