NEW YORK The beginning of the end of the Federal Reserve's determined support for the U.S. economy is expected to come next week when top officials gather for one of the most highly anticipated meetings since the end of the Great Recession.
Despite a lackluster August jobs report, the U.S. central bank will probably reduce its bond-buying program from the current $85 billion per month, given the progress the economy has made over the last year.
Global financial markets were jolted in May when Fed Chairman Ben Bernanke raised the prospect of ratcheting down the Fed's economic stimulus. As U.S. Treasury yields rose, investors sold assets in India and other developing economies that drew inflows in the U.S. easy-money era, prompting complaints by emerging market leaders at last week's Group of 20 meeting.
Stocks have since recovered, although emerging markets could face a fresh bout of pain: European Central Bank Executive Board member Joerg Asmussen warned the spillover from a Fed exit now could be greater now than in 1994, when Fed tightening sparked an emerging market rout.
With the day of reckoning likely upon them, Fed officials may seek to temper the impact of a cut in their purchases by re-emphasizing that buying will continue well into 2014 and that overnight interest rates will not be raised any time soon.
The Fed will update economic forecasts at the conclusion of its September 17-18 meeting and Bernanke will hold a news conference to discuss the policy decision. Hanging over the already-tense meeting is the prospect that President Barack Obama could name Bernanke's successor in coming weeks, which could call into question any longer-term policy promises.
"Given all the energy that has been expended gearing the markets up for a taper, it's hard to imagine the Fed would not take the opportunity to at least cut back modestly this month," said Credit Suisse economist Dana Saporta, who expects a $15 billion to $20 billion reduction.
"We have inadvertently got to a point where we think that an $85 billion asset-purchase program is somehow a neutral stance," she added. "On the contrary, it is incredibly accommodative and would continue to be incredibly accommodative at $65 billion per month."
After a Fed meeting three months ago, Bernanke said the central bank expected to start tapering its bond purchases by year-end, with an eye to bringing them to a halt by mid-2014 if the economy grows as expected.
A number of officials recently have made clear they would be open to start the process next week, with one, Kansas City Federal Reserve Bank President Esther George, urging her colleagues to scale back buying by $15 billion.
According to a Reuters poll of 69 economists, a $10 billion reduction is expected, down from a $15 billion median prediction in an August poll.
The central bank launched its third round of quantitative easing, or QE3, a year ago to encourage investment, hiring and economic growth in the wake of the 2007-2009 recession. Since then, the U.S. unemployment rate has dropped from 8.1 percent to 7.3 percent, while the economy grew a faster-than-expected 2.5 percent in the second quarter.
Still, while monthly job growth has averaged a decent 184,000 over the last 12 months, momentum slowed in August, causing some to second-guess a pending cut to QE3. Worryingly for the Fed, the share of working age Americans with a job or looking for one has fallen to its lowest level since 1978.
Despite the disappointing jobs data, nearly three-quarters of the economists polled by Reuters expect the Fed to trim its purchases next week, rather than wait until meetings in October or December.
The jobs report "is unlikely to stop the start of tapering in September," Richard Gilhooly, U.S. director of rate strategy at TD Securities, wrote in a client note. "A more tepid start to tapering may be the result, or possibly an overly emphasized dovish statement."
Given soft inflation readings this year, the Fed could try to assuage anxieties about tighter policy by strengthening its repeated commitment to keep interest rates near zero at least until the jobless rate falls below 6.5 percent.
Bernanke could also emphasize the Fed will be patient as it ramps down QE3 over the coming quarters.
Yet with his term expiring at the end of January, and the White House expected to announce a successor within weeks - probably either former Treasury Secretary Lawrence Summers or current Fed Vice Chair Janet Yellen - next week's meeting may be the chairman's last chance to start to roll back the extraordinary accommodation before he is seen as a "lame duck."
"Tapering is in the cards if for no other reason than allowing Bernanke to gently start a process that his successor can embrace or accelerate depending on various factors, not the least of which is who that successor will be," wrote Ian Lyngen, senior government bond strategist at CRT Capital.
(Reporting by Jonathan Spicer; Editing by Krista Hughes)