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WASHINGTON — The Federal Reserve is tiptoeing away from its economic stimulus campaign, and so far the broader economy has barely noticed.
The Fed’s policy-making committee, which meets on Tuesday and Wednesday, is widely expected to announce another $10 billion cut in its monthly bond purchases, to $45 billion, en route to ending the purchases this autumn.
Fed officials, meanwhile, have focused on assuring markets that interest rates will remain near zero for the next year or so, and stay low thereafter.
And after a rocky start to the Fed’s retreat last summer, investors generally have accepted the official line, to judge by the prices of financial assets.
“We’re exactly on the right track,†John C. Williams, the centrist president of the Federal Reserve Bank of San Francisco, told Bloomberg News last week.
Things are going well enough that a management issue is rising up the list of the Fed’s concerns. The Fed’s seven-person board in Washington will be reduced to just three members at the end of May, for the first time in its hundred-year history, unless the Senate moves quickly to confirm two additions. A preliminary vote on the nominations of Stanley Fischer and Lael Brainard is scheduled for Tuesday morning.
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From left, Stanley Fischer, Jerome Powell and Lael Brainard, all of whom are nominees to the Federal Reserve Board. Credit Mandel Ngan/Agence France-Presse — Getty Images
If the Senate does not act in time, three people will be left to do the work of seven. Moreover, the Fed’s chairwoman, Janet L. Yellen, and her two remaining colleagues would be allowed to converse with one another only at scheduled public meetings, because any such interaction would involve a majority of the board.
Other challenges are looming. Forecasters, including the Fed’s own staff and its officials, generally expect the economy to grow more quickly in the coming months, rebounding from a cold winter that suppressed first-quarter activity.
An early indication will come Friday, when the government is scheduled to release an initial estimate of job creation in April.
Faster growth could lead some investors to conclude that the Fed will decide to start raising rates sooner, or more quickly, than it has forecast.
“The Yellen-led Fed has not yet been tested,†Vincent Reinhart, chief United States economist at Morgan Stanley, wrote in an analysis last week. “The data thus far in 2014 have been soft enough to make it plausible that the policy interest rate can be kept low for a considerable period, but not so soft as to raise significant concerns about the economic expansion. Fed officials, however, will be pressed to speak more clearly about policy sometime soon as economic data firm.â€
While this week’s meetings are likely to pass quietly — the Fed’s next round of economic projections will be released after its June meeting, which is also the next time that Ms. Yellen is scheduled to hold a news conference — officials are likely to discuss some of the issues that will determine the speed of their retreat from the extraordinary stimulus measures that followed the financial crisis.
In a recent speech, Ms. Yellen named three considerations that will affect their timing: the extent of slack in the labor market, the outlook for inflation and downside risks to growth.
The Fed has chosen to leave open the course of policy once it discontinues its huge bond-buying program. Ms. Yellen said that uncertainty was a consequence of its commitment to take the necessary steps to reduce unemployment and to restore inflation to a healthy pace.
“Tying the response of policy to the economy necessarily makes the future course of the federal funds rate uncertain,†she told the Economic Club of New York. “But by responding to changing circumstances, policy can be most effective at reducing uncertainty about the course of inflation and employment.â€
Since the start of the Great Recession at the end of 2007, the Fed has had a full complement of seven governors just 20 percent of the time. During most of that period, it operated with only five governors. Since early March, there have been only four.
And soon, there could be three. Jeremy C. Stein, who has raised concerns about the stimulus campaign, said earlier this month he would resign at the end of May, preserving his position as a tenured professor of economics at Harvard.
Mr. Fischer, a former head of the Bank of Israel, and Ms. Brainard, a former Treasury official, are both expected to get the banking committee’s support, along with Jerome H. Powell, a board member since 2012 nominated to serve a new term.
But they would then join a logjam of scores of presidential nominees for positions across the government who are awaiting action by the full Senate. While Democrats prevented indefinite delays by changing the Senate’s procedural rules last year, Republicans have responded by slowing each confirmation process.
And even the confirmation of Mr. Fischer and Ms. Brainard would leave a pair of vacancies on the Fed’s board. The White House is under considerable pressure from community bankers and their political supporters to choose someone with small-bank experience to the board.
Fifteen Democratic and Republican senators — including eight members of the banking committee, which screens nominees — sent a letter to President Obama this month requesting that Mr. Stein be replaced by someone who has served as a community banking regulator or an executive of a smaller bank.
The administration also would like to nominate at least one more woman; the Fed’s board had three women when it was most recently at full strength.
Two people involved with the issue, who spoke on condition of anonymity to describe private deliberations, said the White House was considering, among others, Diana L. Preston, a lawyer who recently left the American Bankers Association, where she worked on securities issues; Ann Marie Mehlum, an official at the Small Business Administration who ran a small bank in Oregon; and Rebeca Romero Rainey, chief executive of Centinel Bank of Taos in New Mexico.
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