Will US Federal Reserve ease back on stimulus?

Stephanie Flanders examines the impact of the Federal Reserve's stimulus measures

Eyes across the globe will be trained on Washington on Wednesday as the Federal Reserve concludes its two-day meeting.

US Federal Reserve chairman Ben Bernanke is expected to announce an end to the central bank's extraordinary stimulus efforts.

Fed watchers believe that the bank will begin to slow down its purchase of $85bn of bonds monthly.

This would indicate that Fed officials think the US economy is back on track.

Markets have been primed to expect a slowdown in the bank's efforts at quantitative easing, in a move known as a "taper", ever since Mr Bernanke hinted at a pullback in front of Congress in June.

"A small taper seems to be what the market is expecting," says former Fed economist Joseph Gagnon, who thinks the central bank will pull back its bond purchases to somewhere between $70bn and $75bn a month.

But the challenges confronting the Fed are vast as it tries to navigate a completely new situation: how to return to normal, five years after the housing market collapse and subsequent recession forced the bank into new and untested stimulus tools.

In the middle-class suburb of Wayne, New Jersey, both the impact of the Fed's policies over the past few years and the conundrum the bank currently faces are fully on display.

'They'll never go lower'

To see the Fed's stimulus efforts in action, look no further than David and Julianne Philp.

David and Julianne Philp David and Julianne Philp sit outside their home with a binder full of their mortgage refinance papers

They've lived in the same quaint white house on a leafy side street in Wayne for the past 17 years.

In the middle of the recession, David lost his job.

"By 2009, I'd been out of work for about 14 months and we needed to save money," says David.

Start Quote

This was our first summer in a long time when were able to not worry”

End Quote Julianne Philp

So, after seeing an advertisement about low mortgage rates - rates that were lowered as part of the Fed's initial efforts to stimulate the economy, in the wake of the housing market collapse - David and Julianne decided to refinance their home.

"The rate went from 5.25% in 2009 to 4.5%," says David, which allowed the couple to stay afloat during those lean years.

"After we refinanced in 2009, we thought, 'Well, they'll never go any lower than that,'" says David.

But of course, rates did go lower, because of the Fed's extraordinary efforts to lower longer-term mortgage rates by buying mortgage-backed securities as part of quantitative easing.

Once more, the couple did the maths - and figured out that another refinancing effort could help them.

The Philps playing catch The Philps say that now they're on more secure financial footing, they can begin to save again

This time around, the rate on their 30-year mortgage was lowered to 3.785%, which allowed them to save more than $300 a month on mortgage payments. Additionally, they could pay off credit card debt that had accumulated during the recession.

"We just wanted to get back on our feet, feel good about our money situation and start saving," says Julianne.

Now, they can repaint their home, go out to dinner and begin saving for the future college tuition of their two daughters, aged nine and 12.

"This was our first summer in a long time when were able to not worry," says Julianne.

'A dramatic increase'

The US economy was also relatively worry free this summer, with job growth holding relatively constant at 160,000 a month and good, if not great, GDP figures.

Wendy Nastasi Wendy Nastasi worries that higher interest rates could hurt the US economic recovery

The Fed's efforts to boost consumer spending by keeping mortgage rates low and then lower seems to have worked, as the Philps and others like them recover from the wounds of the recession and begin to find themselves with extra cash on hand.

But the question remains: is the US economy strong enough to continue to grow without the Fed's extraordinary efforts?

Wendy Nastasi, the mortgage broker who helped the Philps with their refinancing, worries that the tap might be prematurely turned off.

"We've seen a dramatic increase in mortgage rates, almost overnight," says Ms Nastasi.

Over the summer, the rate on a 30-year fixed mortgage rose one percentage point, and already the number of US homeowners looking to refinance has plunged from 17% in early 2013 to just 2% today.

"You're going to see what improvements we're seeing in the housing market stall," cautions Ms Nastasi.

This stall could have a knock-on impact.

Start Quote

If the economy's improving, you can't prove it by me”

End Quote Travis Nonn Park Wayne Diner patron

"If you have fewer mortgage refinancings, that suggests that households will have less cash than otherwise to spend on a variety of goods and services," says John Lonski, chief economist at Moody's Capital Markets.

Mr Lonski says that since consumer spending makes up two-thirds of US economic activity, a slowdown in refinancing could have profound effects.

'I've been out of work nine months'

So this is the tightrope walk that the Fed must negotiate.

On the one hand, Mr Bernanke and his fellow central bankers worry about keeping their foot on the accelerator for too long, potentially leading to higher inflation.

But take their foot off too soon and they risk prematurely slamming on the brakes of a fragile US recovery.

"Personally, I think it is too soon to taper, because the economic data have been disappointing and inflation is below target," says Mr Gagnon, who is now at the Peterson Institute for International Economics, a think tank in Washington DC.

"But I think several members of the committee are nervous about buying so many bonds."

Diner patrons Patrons at the Park Wayne diner are mixed on whether or not the US economy is back on track

At the Park Wayne Diner, just a few minutes away from the Philps' house, the difficulties of the situation are on full display.

Owner John Stoupakis says that business has been good, but not great.

"I think the economy is going to be better, but it's not where it's supposed to be - here, business has been off," he says as he surveys his busy, if not bustling, dining room.

Diner patron Jerry Eisenberg says he's impatient for the Fed to stop its stimulus efforts.

As a retiree, he says low interest rates have hurt his savings.

"We could feel a little more freer to spend [if rates were higher]," he says.

Park Wayne diner exterior Park Wayne diner owner John Stoupakis says business is good, but not great

"To make money on savings, you have to take risks now."

But for others, the situation remains grim.

"I haven't worked in nine months, I'm looking for anything that will pay me," says 30-year-old Travis Nonn.

"If the economy's improving, you can't prove it by me."

More on This Story

US Economy

More Business stories

RSS

Business Live

  1.  
    10:45: Club Med takeover battle
    ClubMed advert

    The stakes have been raised in the game to buy French holiday group Club Med. China's Fosun has raised its offer to €24.60 per share, which values Club Med at €939m. It trumps an offer from Global Resorts, which is controlled by Italian businessman Andrea Bonomi. His bid valued Club Med at €915m. Fosun wants to expand the firm in China and Brazil.

     
  2.  
    Via Twitter Douglas Fraser Business and economy editor, Scotland

    "Standard Life Investm'ts expands to new-build on sth St Andrew Sq Edinburgh: 10 new offices from Tokyo to Stockholm, expanding existing ones"

     
  3.  
    10:26: Air France shares slump
    Striking Air France pilots

    Shares in Air-France KLM have slumped 6% after the airline issued its third profit warning of the year late on Thursday. It blamed continued costs from a strike by pilots earlier this year. Sales, particularly of long-haul tickets, are weak, according to the airline. It also said that it was not yet seeing the benefit of falling oil prices.

     
  4.  
    10:13: Russia crisis
    A board showing currency exchange rates

    The Russian rouble has steadied gaining almost 3% and at one point it traded below 60 to the dollar. It comes after Russian finance minister Anton Siluanov said the rouble would definitely hold firm at the beginning of next year. He also said the ministry had been selling foreign currency.

     
  5.  
    10:00: Government borrowing falls

    Borrowing was also revised down for the first half of the year. Overall, year-to-date borrowing was £2.4bn less than first thought, mostly reflecting lower estimates of central government spending and higher assessments of receipts. The borrowing figure for November also came in £1bn less than the City expected.

     
  6.  
    09:49: Oil prices
    Brent crude price

    Oil prices have strengthened a bit this morning. North Sea Brent Crude is up 1% at $59.87 a barrel. You can see what a volatile week it has been from the chart above, with oil trading in a near $5 range and this week and breaking well below the $60 a barrel mark.

     
  7.  
    09:37: Government borrowing falls

    Government borrowing in November was £14.1bn, that's down £1.6bn compared with a year earlier, the Office for National Statistics (ONS) says.

     
  8.  
    Government borrowing falls 09:33: Breaking News

    Public sector borrowing from April to November 2014 was £75.8bn, a fall of £0.5 billion compared with the same period in a year earlier, official figures show.

     
  9.  
    09:20: Market update

    The FTSE 100 is stronger in early trading following that big jump for US shares on Thursday. Oil services firms have been hit this morning, Petrofac leads the FTSE 100 lower with a 4.5% loss.

     
  10.  
    09:02: Cyprus denied bailout cash

    The Cypriot parliament says it wants more time to draft a new law to protect people from losing their homes as a result of last year's banking crisis. The IMF says it will discuss the next steps with Cypriot authorities. The European Union had released a €350m instalment before the vote, bringing the amount of bailout cash given to Cyprus so far to €5.7bn.

     
  11.  
    Via Twitter Douglas Fraser Business and economy editor, Scotland

    "Big contract win for Schlumberger, providing drilling + well services for Statoil, in big new Mariner heavy oilfield, east of Shetland"

     
  12.  
    08:45: Cyprus denied bailout cash
    A  man walk outside a branch of Bank of Cyprus in Nicosia

    Remember last year's bank crisis in Cyprus? Well, the island nation may be in trouble again. The International Monetary Fund (IMF) is refusing to give Cyprus an €86m tranche of rescue money after the Cypriot parliament voted to suspend an insolvency law - due to take effect at the end of the month - that would have made it easier for banks to start to collect on bad loans.

     
  13.  
    08:40: North sea oil outlook BBC Breakfast
    Dominic Laurie, BBC Breakfast

    Around 375,000 people work in the UK oil industry and half of those are in north east Scotland says a cold looking Dominic Laurie from Aberdeen docks on BBC Breakfast. He speaks to the chief executive of Wood Group Bob Keiller. He says the industry has been through this kind of challenge before when the oil price collapsed in 1986 and 1998. He says the oil industry came out stronger.

     
  14.  
    08:25: North Sea oil outlook Radio 5 live

    More from Sir Ian Wood. He thinks that oil prices will be around $60 to $65 a barrel over the next 18 months and then will recover. That could prompt job losses of up to 10% in the UK oil industry, although he thinks it is more likely to be 5%. He says that investment plans are made 2-3 years in advance, so the impact is not immediate.

     
  15.  
    08:18: North Sea oil outlook Radio 5 live

    "Well over the top and far too dramatic," is how Sir Ian Wood describes a warning that the North Sea oil exploration business is close to collapse. Sir Ian is the Scottish billionaire who was commissioned by the government to carry out a review of the UK's oil industry.

     
  16.  
    08:09: Newspaper review
    Business pages

    The bid by IAG for Aer Lingus dominates today's business pages. Times Chief Business Commentator, Alistair Osborne says IAG's timing is not great as Aer Lingus shares are up 54% over the past year. Away from that, in the Financial Times Gillian Tett warns about the amount of dollar-denominated debt held offshore by companies from emerging markets. Graham Ruddick of the Telegraph warns that next year could be even worse than this year for the big supermarkets chains.

     
  17.  
    07:59: North Sea oil outlook BBC Radio 4

    Ian Theophilus an oil and gas consultant tells Today he expects a number of North Sea oil projects - planned with a higher oil price in mind - may be reduced or cut altogether. He says he is very worried about the prospect for North Sea oil in 2015. He says he and colleagues "remember the late 1980s and 1990s" when the oil price was between $9 and $11 per barrel and "everything was stuck". "The chances are that could happen again," he adds.

     
  18.  
    07:51: Keeping the lights on

    Reacting to the completion of the energy auction Energy Secretary Ed Davey, said: "This is fantastic news for bill-payers and businesses. We are guaranteeing security at the lowest cost for consumers. We've done this by ensuring that we get the best out of our existing power stations and unlocking new investment in flexible plant."

     
  19.  
    07:41: Keeping the lights on

    Companies will be paid £19.40 per kilowatt by the government to provide backup power following an auction process that has been going on all week. The new scheme is designed to ensure the nation has a sufficient energy buffer to cope with peak demand - usually over the winter.

     
  20.  
    07:32: Premier League TV review
    Premier League logo on a football

    Ofcom has launched a consultation on its view that the current division of Premier League and Champions League football between Sky and BT harms competition between pay TV retailers. Back in 2010 Ofcom ordered Sky to offer its sports channels to rivals at a price set by the regulator. It is now reviewing whether that has helped competition and "remains appropriate". There will be a second phase of the review in 2015.

     
  21.  
    07:20: North Sea oil outlook Radio 5 live
    North Sea oil platform

    It's extremely difficult to tell if the North Sea oil business is heading into the same kind of crisis that it saw in 1986, says Aberdeen businessman Charles Skene on Radio 5 live. Kenny Anderson the boss of an Aberdeen construction firm remembers the "strife" caused in 1986 when oil fell to $36 per barrel. But predicting oil prices is an "impossible game" he points out.

     
  22.  
    07:10: Samsung shareholder payout

    Samsung Electronics is considering increasing its dividend payout this year by between 30% and 50% compared to 2013.

     
  23.  
    06:56: Nigerian currency crisis BBC Radio 4

    Phillip Walker of the Economist Intelligence Unit, tells Today the crisis facing Nigeria is far bigger than the one facing Russia. Nigeria's currency the naira has fallen 15% against the US dollar this year forcing the country's central bank to impose foreign currency trading controls. "Nigeria has a bigger population than Russia, its economy relies on oil exports more than Russia, so it's a big problem," Mr Walker says.

     
  24.  
    06:48: Gas prices BBC Radio 4

    Professor Green says energy suppliers have an eye on politics at the moment. He says Labour leader Ed Miliband's promise to freeze energy prices for 20 months if his party wins next year's election may mean suppliers will keep prices artificially high despite currently benefitting from lower gas costs.

     
  25.  
    06:34: Gas prices BBC Radio 4

    While falling oil prices have recently caught the attention of many, the cost of gas has also been coming down. That's because demand in Europe has been falling due to a relatively warm winter so far. Richard Green professor of sustainable energy business at Imperial College London tells Today we shouldn't expect lower energy bills are a result. That's because energy suppliers are selling us gas they bought at last year's prices.

     
  26.  
    06:32: Asian markets

    Asian stock markets have had a mixed session. They Nikkei 225 is up more than 2%. Hong Kong's Hang Seng is up 1.4%. Shares in Shanghai have fallen back after hitting a four-year high in early trading. The Shanghai composite is down 0.1%.

     
  27.  
    06:21: China recalculates growth
    Chinese flag

    China's economy is bigger than originally thought. The government has revised up the size of the economy in 2013 by 3.4% to 58.8 trillion yuan ($9.5 trillion). The increase was mainly accounted for by a greater contribution from the services sector. In comparison, the US economy was worth almost $17 trillion in 2013.

     
  28.  
    06:14: IAG bid for Aer Lingus Radio 5 live
    Dublin Airport

    British Airways owner, IAG is "good at integrating new airlines" says Richard Hunter, head of equities at Hargreaves Lansdown. He is explaining why IAG made a bid for Aer Lingus. The Irish airline is attractive because it has lots of landing slots at Heathrow, says Mr Hunter. IAG may also have a bit more spending power because of the lower oil price, he adds.

     
  29.  
    06:06: North Sea oil jobs Radio 5 live
    Oil worker

    North Sea oil companies are cutting wages, rather than jobs at the moment, says Alan Savage chairman of recruitment company Orion Group on Radio 5 live. For agency workers wages have already been cut by up to 20%. He says that the British oil industry is highly taxed and the "government has a lot to answer for".

     
  30.  
    06:02: Russian crisis Radio 5 live
    Russian President, Vladimir Putin

    Next year is going to be grim for the Russian economy, says Craig Botham, emerging markets economist at Schroders on Radio 5 live. The economy is likely to contract 4.5%, inflation is forecast to be betweem 11% and 12%. The rouble could keep on weakening, "it's hard to see a particular floor for the currency" Mr Botham says.

     
  31.  
    05:59: Ben Morris Business Reporter

    Do get in touch. Email bizlivepage@bbc.co.uk or tweet @bbcbusiness.

     
  32.  
    05:59: Matthew West Business Reporter

    Morning folks. The news the US Federal Reserve is in no hurry to raise interest rates boosted shares on Wall Street and in Asia to new highs. Meanwhile the Bank of Japan maintained its commitment to government bond buying at its last meeting of the year. And we'll be keeping an eye on the Russia rouble and oil price again today and there may be more on IAG's bid for Aer Lingus. Stay with us.

     

Features

From BBC Capital

Programmes

  • A prosthetic legClick Watch

    How motion capture technology is being used to design bespoke prosthetics

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.