The Federal Reserve will probably introduce an unprecedented second round of unconventional monetary easing tomorrow by announcing a plan to buy at least $500 billion of long-term securities, according to economists surveyed by Bloomberg News.
Policy makers meeting today and tomorrow will restart a program of securities purchases to spur growth, reduce unemployment and increase inflation, said 53 of 56 economists surveyed last week. Twenty-nine estimated the Fed will pledge to buy $500 billion or more, while another seven predicted $50 billion to $100 billion in monthly purchases without a specified total. The remainder said the Fed would buy up to $500 billion or didn’t quantify their forecast.
The varied responses reflect differences among Fed officials over the total amount of purchases needed to bolster the recovery. Policy makers, pursuing unprecedented stimulus, have cut the benchmark rate almost to zero and bought $1.7 trillion in securities without generating growth fast enough to bring down unemployment from near a 26-year high.
“There’s no silver bullet right now” and central bankers have “very few options left in terms of lowering interest rates,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. He predicted $500 billion of Treasury and mortgage-backed securities purchases in the next six months.
Shock-and-Awe Plan
Disagreements among policy makers over whether to expand the balance sheet incrementally or stage a so-called shock-and- awe program of big asset purchases have created confusion among investors over the likely size and duration of any new easing, said Ward McCarthy, chief financial economist at Jefferies & Co. in New York.
“There has not been a uniformity of opinion emanating from the multitude of public appearances from Fed officials,” McCarthy said. He predicts the Fed will buy $500 billion of securities over the next six months and was among 13 economists who said the purchases would include mortgage-backed bonds in addition to Treasuries.
New York Fed President William Dudley set expectations at $500 billion in purchases when he said in an Oct. 1 speech that purchases totaling about that amount would add as much stimulus as lowering the Fed’s benchmark rate by 0.5 percentage point to 0.75 percentage point.
Dudley put the $500 billion figure “in there and it sounded like he was trying to move it along in that direction,” said Chris Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ Ltd. in New York, who predicts the Fed will announce up to $500 billion of purchases by March.
Many Variables
Referring to investor expectations of the central bank’s next move, Rupkey said, “It’s a mess, and it’s just because there’s too many variables between the amount and the time period.”
St. Louis Fed President James Bullard said on Oct. 21 the Fed should buy $100 billion in long-term Treasuries this month and calibrate subsequent purchases based on the course of the economy. Atlanta Fed President Dennis Lockhart said that a pace of $100 billion of purchases a month is “in the range of numbers one might consider.”
Estimates by economists about the duration of a Fed asset purchase program ranged from as short as three months to as long as the end of 2011. Three analysts said the Federal Open Market Committee wouldn’t announce new stimulus.
Favorable Reaction
“It’s highly unlikely that anyone’s going to get all the details right because going into the meeting Fed officials themselves won’t have agreed on all of” them, Jefferies’ McCarthy said. He said he expects the Fed to buy mortgage-backed securities because it would be a positive surprise, and the central bank wants a “favorable market reaction.”
The lack of clarity over the Fed’s plans has played out in the Treasury market, which handed investors a loss of 0.18 percent in October, the first negative monthly return since March, according to index data compiled by Bank of America Merrill Lynch. After falling to 2.38 percent on Oct. 7 from 2.51 percent on Sept. 30, the yield on 10-year Treasuries has since climbed to 2.63 percent as of late yesterday, Bloomberg data show.
Not all Fed officials agree the central bank should start new stimulus measures. Kansas City’s Thomas Hoenig, who has already dissented six straight times, said on Oct. 25 that he opposes more easing because it’s “a very dangerous gamble” that may accelerate inflation and create asset-price bubbles. Dallas Fed President Richard Fisher and the Philadelphia Fed’s Charles Plosser have also spoken out since the FOMC’s last meeting against more action by the central bank.
Asset Bubbles
“When money is too easy for too long, we will have more” asset bubbles, former Fed Chairman Paul Volcker, an adviser to President Barack Obama, said today in Singapore.
Chicago Fed President Charles Evans said several times last month that the central bank needs to take action and should buy securities on a large scale to carry out his preferred strategy of aiming to raise inflation temporarily.
“They’re in uncharted waters here, and no one really knows, we’re all guessing” about the size and duration of the easing program and its ultimate impact, said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “I haven’t seen anybody out there who has made a convincing case that this is anything but a trivial boost for the economy.”
Expectations
The central bank last month asked bond dealers and investors for projections of its asset purchases over the next six months, along with the likely effect on yields. The New York Fed, the branch of the Fed System that implements monetary policy, asked about expectations for the size of the program and the time over which it would be completed, according to a survey obtained by Bloomberg News.
Stanley predicted the Fed will opt for the incremental tactic and announce a program to buy $200 billion of Treasuries by its Jan. 26 meeting.
“They want to preserve flexibility and to have the option of tweaking the pace as they go based on whatever it is that they choose to look at,” Stanley said.
“Clearly the thrust of this is to get long-term rates lower, but when you listen to what they say about it, they don’t even plan to get a lot of juice out of what they want to do,” he said. “What does that do for the economy?”
Dudley, who is also vice chairman of the FOMC, said in the Oct. 1 speech that the central bank would probably need to act to address “unacceptable” job growth and inflation.
Inflation Eases
The U.S. economy expanded at a 2 percent annual rate in the third quarter and inflation cooled, Commerce Department figures showed Oct. 29 in Washington. The report showed the inflation gauge watched by the Fed rose the least in almost two years as retailers like Wal-Mart Stores Inc. and Target Corp. use discounts to lure shoppers.
In addition to a new round of asset purchases, policy makers are also considering efforts to boost public expectations that inflation will rise, according to the minutes of the FOMC’s Sept. 21 meeting.
All but two economists predict the Fed will leave the interest rate on excess reserves unchanged at 0.25 percent. Fifteen analysts, including McCarthy, say the Fed will alter the phrase that its benchmark interest rate will stay near zero for an “extended period,” which was introduced in March 2009.
“They’ve been telling us they’ve been considering a change to the ‘extended period,’ so at some point they’re going to do it and this is as good a time as any,” McCarthy said.
The questions were as follows:
1a. At the FOMC’s Nov. 2-3 meeting, will the committee decide to (choose one):
a) Retain the current policy of keeping a constant level of the Fed’s securities holdings by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities
b) Increase the level of securities holdings through additional asset purchases
Result (56 replies): A, 3; B, 53.
1b. If you answered (b) to the last question, please provide your predictions on the following possible elements of the announcement:
a. The amount of additional purchases announced in billions
of dollars:
b. The length of time for the additional purchases to be
completed:
c. The types of securities to be purchased:
1) Treasuries
2) mortgage-backed securities
3) both Treasuries and MBS
4) other (please elaborate)
Result (53 replies): a) 29 expect $500 billion or more; 7 predicted monthly purchases of $50 billion to $100 billion without specifying a total; 12 predicted up to $500 billion; 5 didn’t specify an amount.
b) 7 predicted monthly purchases with no timeline; 9 predicted up to three months; 17 said between three and six months; 9 said between six months and one year; 5 said through 2011; 6 didn’t specify a pace or timeline.
c) 38 said Treasuries (including Treasury-Inflation Protected Securities); 13 said both Treasuries and MBS (including one that also predicted agency bond purchases); 2 didn’t specify.
2. Will the FOMC statement following the Nov. 2-3 meeting include any changes to the following sentence: “The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” Yes or no.
Results (49 replies): Yes, 15; No, 34.
3. Will the Fed decide at the Nov. 2-3 meeting to reduce the 0.25 percent interest rate on excess reserves? Yes or no.
Results (47 replies): Yes, 2; No, 45.
