Fed gives no hint on QE tapering timeline

WASHINGTON (July 31) The Federal Reserve on Wednesday slightly downgraded its economic outlook but gave no hint about its plans for its $85 billion-a-month asset purchase program.

The statement released after a meeting of the Fed’s policy making committee said that the economy was expanding at a “modest” pace, a change from the “moderate” pace seen in June.

The Fed also noted that the rise in mortgage rates was a concern. It also said that persistently low inflation was a risk. There was only one dissent, by Kansas City Fed President Esther George.

U.S. stocks  SPX +0.42%  moderately extended their advance after the news. However,

In its statement, the Fed said “the housing sector has been strengthening, but mortgage rates have risen somewhat.”

It said that inflation “persistently below its 2% objective could pose risks to economic performance,” although it expects inflation will move back towards 2% over the next 18 months. That new statement may have won over St. Louis Fed President James Bullard, who dissented at the last meeting.

The Fed has been buying Treasurys and mortgage-related bonds in an effort to keep long-term interest rates down and spur the economy.

Fed Chief Ben Bernanke announced in late May that the central bank intends to start slowing down the pace of its purchase “later this year” if the economy continues to improve. He said the purchases could conclude by mid-2014 if the unemployment rate is close to 7%.

This comment sparked turmoil in financial markets, with bond yields eventually rising by 100 basis points.

Fed officials rushed to calm investors. Bernanke stressed there was no “preset course” for tapering and that any decision depended on the data.

Economists differ over when the Fed will start to slow down purchases.

According to Blue Chip, 66% of the economists in its latest survey believe the Fed will taper at its next meeting on September 17-18.

About 25% think the central bank will delay the tapering until October and just under 10% see December as the start date.