Posted by Leonard Steinberg on September 18th, 2013

This week, five years ago, the global financial crisis reached a fever pitch with the collapse of Lehman Brothers. Today the U.S. Federal Reserve is expected to begin its long retreat from ultra-easy monetary policy by announcing a small reduction in its bond buying, while stressing that interest rates will remain near zero for a long time to come. Most economists expect the Fed to scale back its monthly purchases by about $10 billion, taking them to $75 billion, signaling the beginning of the end to an unprecedented episode of monetary expansion that has been felt worldwide. The cash faucet is being toned down.

The Fed will announce its decision in a statement following a two-day meeting at 2 p.m., and Fed Chairman Ben Bernanke will hold a news conference a half hour later. It is also set to release fresh quarterly economic and interest rate projections. The Fed has said it will not begin raising rates until the unemployment rate hits 6.5 percent, provided inflation does not hit 2.5 percent. August’s jobless rate stood at 7.3% in August.

When they slashed overnight rates to zero in late 2008, the Fed launched an extraordinarily bold campaign to shelter the U.S. economy and included three rounds of bond purchases that more than tripled its balance sheet to around $3.6 trillion, sparking intense criticism from those who feared the measures would create an asset bubble or fuel inflation. But the central bank’s show of force was credited with saving the U.S. and world economies from a much worse fate.

With the U.S. economy now on a somewhat steady, if tepid, recovery path and unemployment falling, policymakers have said the time was drawing near to begin ratcheting back their bond buying with an eye toward ending the program around mid-2014. While U.S. government bond yields and mortgage rates have shot higher in anticipation of less Fed support, the central bank will still be expanding its balance sheet for many more months as it tries to wean the economy and financial markets from its ever-expanding stimulus.

Weaning seems more prudent than slashing, and keeping interest rates low will be important to keep the housing market healthy, where it has already shown some signs of a slowdown in parts of the country. Even the explosively strong Manhattan real estate market is now at a pace that one would term ‘normal’. Now we enter the next major phase of the real estate market where the volume of inventory will rise considerably, although much of it coming from new construction will require long waits for delivery as many of these buildings are expected to be completed 12-30 months from now. With most developers focused exclusively on larger, very high priced apartments, will the market experience over-supply in certain classifications that were once acutely under-supplied?