Meeting may not clarify Fed’s plan to reduce aid

WASHINGTON — When the Federal Reserve offers its latest word on interest rates this week, few think it will telegraph the one thing investors have been most eager to know: when it will slow its bond purchases, which have kept long-term borrowing rates low.

The Fed might choose to clarify a separate issue: when it may raise its key short-term rate. The Fed has kept that rate near zero since 2008. It has said it plans to keep it there at least as long as unemployment remains above 6.5 percent and the inflation outlook below 2.5 percent. Unemployment is now at 7.6 percent; the inflation rate is roughly 1 percent.

Chairman Ben Bernanke has stressed that the Fed could decide to keep its short-term rate ultra-low even after unemployment reaches 6.5 percent. Testifying to Congress this month, Bernanke noted that a key reason unemployment has declined is that many Americans have stopped looking for jobs. When people stop looking for work, they’re no longer counted as unemployed.


If that continues, Bernanke said, lower unemployment could mask a still-weak job market and the Fed might feel short-term rates should stay at record lows.

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In the statement the Fed will issue Wednesday, it could specify an unemployment rate below 6.5 percent that would be needed before it might raise its benchmark short-term rate. It might also say that it won’t raise that rate if inflation remains below a specific level.

Investors would react to any such shift in the Fed’s guidance. Financial markets have been pivoting for months on speculation that the Fed will or will not soon slow its $85-billion-a-month in Treasury and mortgage bond purchases. Those purchases have led more consumers and businesses to borrow, fueled a stock rally, and supported an economy slowed by tax increases and US spending cuts.

The Fed has signaled that it might slow its bond buying as soon as September — if the economy has strengthened as much as the Fed has forecast.

Many economists think the goal of the Fed’s policy discussions Tuesday and Wednesday will be to stress that the Fed’s actions in coming months will hinge on how the economy fares, not on any timetable.


Some economists think the Fed will be mindful that the Dow Jones average sank more than 500 points in two days in June after Bernanke said the Fed would probably slow its bond-buying this year and end it next year.

‘‘The Fed is going to try to calm things down,’’ said Brian Bethune, an economics professor at Gordon College in Wenham, Mass.

Some economists still think the Fed will start trimming its bond purchases at its Sept. 17-18 meeting. Unlike this week’s meeting, the September meeting will be followed by a news conference at which Bernanke could explain the actions.

Diane Swonk, chief economist at Mesirow Financial, said September is a likely time for the Fed to scale back. Yet she doubted it will do anything this week to signal that possibility. ‘‘The less said right now, the better,’’ for financial markets, she said.

David Jones, at DMJ Advisors, thinks the Fed will start trimming its purchases gradually, starting in September. But the timing could change if the economy doesn’t strengthen over the next two months. Other economists say the Fed may prefer to wait until after September to make sure the economy is sustaining its gains.