Decision Time for the Federal Reserve

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Gary Cameron / Reuters

The Federal Reserve commenced its final meeting Open Market Committe of the year Tuesday morning, and after a couple of relatively strong jobs reports, market watchers are wondering whether this is the week in which the Fed finally begins to taper its purchases of long-term government debt and mortgaged-backed securities known as quantitative easing (QE).

What’s the case for pulling back on stimulus? The unemployment rate has fallen pretty quickly — down to 7 percent from 7.6 percent in June. Meanwhile, opponents of the policy argue that it’s encouraging dangerous speculation in the markets, and that the benefits of the program have been yielding diminishing returns. Critics say that unwinding the program will be more difficult the longer it is allowed to go on, and so the Fed should move quickly to begin its unwinding.

Proponents of QE, however, argue that tapering stimulus now — just when job creation seems to be accelerating — is the wrong idea. Better to err on the side of keeping interest rates as low as possible to encourage more hiring, especially at a time when inflation is so low.

So what will the Fed do tomorrow? Sixty-six percent of economists polled by Bloomberg earlier this month say the Fed will decline to taper, so it appears the smart money is still on the central bank staying the course. The Federal Reserve will announce its decision at 2 p.m. tomorrow.