View from Jackson Hole retreat

JACKSON HOLE, Wyo. (MarketWatch) — The Federal Reserve seems on track for a small reduction in the pace of its asset purchase program in September, according to experts attending the central bank’s annual retreat in Jackson Hole.

There was a palpable sense at the gathering that Fed officials are eager to bring the era of extraordinary policy stimulus to an end.

Read what business economists expect of Fed taper

“There is a yearning to get back to normal” said John Taylor, the Stanford University economist, in an interview.

Jim O’Sullivan, chief U.S. economist at High Frequency Economics, said “the message is right now that they go in September. I haven’t heard anything to suggest expectations for a September move are off-base.”

Barry Eichengreen, an economist from the University of California Berkeley, said he sensed that the central bankers were looking past potential pitfalls.

“I think there is a desire to return to conventional monetary policy, but we don’t have a normal economy,” Eichengreen said.

He said he was surprised how little “visible alarm” there was from Fed officials about recent volatility in emerging markets tied to the Fed’s tapering plan.

Fed Chairman Ben Bernanke said the Fed would start to pull back from its $85 billion-a-month asset purchase program “later this year” if the economy continues to improve as expected.

Markets expect the Fed to cut the asset purchase plan by $20 billion in September.

O’Sullivan said the Fed might engineer a smaller $10 billion reduction at first.

Many participants at the Jackson Hole conference want the central bank to wait until later in the year.

They note there are an impressive array of challenges that await the central bank this fall.

For example, Congress and the White House have made no apparent progress on any way to end the bitter divide over fiscal policy. In addition, a spike in interest rates since the talk of taper started could stall the housing market and emerging market economies are slowing down in part due to take of a Fed exit.

After September, there are two more Fed policy meetings this year, one in October and the last in December.

“I think it is too soon,” said Susan Collins, dean of the University of Michigan’s Gerald R. Ford School of Public Policy. She noted that recent economic indicators has been mixed.

A September move “could be premature,” agreed Eichengreen.

But others argued that September was as good a time as any to move.

“The sooner, the better to get started,” said Taylor. Otherwise you just keep postponing the inevitable, he said.

Bernanke, whose views may decide whether the Fed moves in September, didn't attend this year’s Jackson Hole retreat.

Former Fed Gov. Randy Kroszner said he favored a small “step down” in September, after which there could be a pause for the central bank to gauge the impact on the markets and the economy.

If all goes well, the Fed could then reduce the pace of purchases over the next seven meetings until the middle of next year, Kroszner said.

Others weren't so sure that the tapering path would be so smooth.

“Everyone is realizing that tapering is not going to be easy,” said former Fed Gov. Lawrence Lindsey.

Interest rates spiked over 100 basis points just on talk from the Fed of a pullback.

“The Fed is learning it is hard to wean the addict off the drug,” Lindsey said.

Collins said that the markets might have to cope with “a range of views” from Fed officials about the right course of action.

“Hopefully markets are not going to overreact,” she said.

Glenn Hubbard, dean of the Columbia University Gradual School of Business, said he thinks the Fed will wait until December to slow the pace of purchases due to an absence of a clear sense of the economy’s direction.

One factor that may be driving the Fed is the transition to new leadership. Bernanke is widely seen as leaving his post when his term ends in January. A spirited debate has broken out over whether former Treasury Secretary Larry Summers of Fed Vice Chair Janet Yellen would replace him.

“The Fed would like to be headed toward exit on Bernanke’s watch,” said Vincent Reinhart, chief U.S. economist at Morgan Stanley.