Fed faces tough call on bond buying as economy strengthens

WASHINGTON (REUTERS) - The Federal Reserve will decide on Wednesday whether the US economy is finally resilient enough to withstand less policy support, or whether it is prudent to wait a bit longer.

With the world's financial markets on edge, the US central bank wraps up a two-day meeting with a highly anticipated policy announcement at 1900 GMT (3am Singapore time), followed by Mr Ben Bernanke's last news conference as Fed chairman a half hour later.

Recent growth in jobs and retail sales, as well as a fresh budget deal in Congress, has convinced a growing number of economists the time is right for the Fed to trim its US$85 billion (S$107 billion) in monthly bond purchases. The 15-month-old programme is meant to put downward pressure on long-term borrowing costs in order to stimulate investment and hiring. But many observers believe the central bank will wait until early in the new year, given persistently low inflation and the fact that the world's largest economy has stumbled several times in its crawl out of the 2007-2009 recession.

"It is increasingly looking like a coin flip," said Mr Michael Feroli, JPMorgan's chief US economist.

If it waits, the Fed might still decide to better telegraph how it plans to wind down the stimulus programme, as a handful of its 18 policymakers have suggested in recent weeks.

The Fed has kept interest rates near zero since 2008 and plans to leave them there for a while longer irrespective of when it begins to taper the bond buying. The purchases have swelled its balance sheet to a record US$3.9 trillion.

The unprecedented money-printing has helped drive US stocks to record highs and sparked sharp gyrations in foreign currencies, including a drop in emerging markets this year as investors anticipated an end to the easing. There has also been some anxiety in the United States that it could fuel inflation and hard-to-detect asset price bubbles.

Fed officials will also update their economic forecasts on Wednesday, likely acknowledging the faster-than-expected drop in joblessness to a five-year low of 7 percent last month.

Perhaps most critically for investors, they could also tinker with their longer-term policy promises.