JPMorgan Sees a 75% Chance of More Quantitative Easing by Fed This Year
JPMorgan Chase & Co. said there’s a 75 percent chance that the Federal Reserve will start another round of asset purchases before the end of this year to boost the economy, supporting Treasury bond prices.
The U.S. central bank may spend “a few hundred billion dollars” on a so-called quantitative easing program, and it’s likely to keep the official rate on hold until 2012, said Pavan Wadhwa, head of European interest-rate strategy in London at JPMorgan.
“The Fed is likely to do more quantitative easing, and that will pull Treasury yields lower,” Wadhwa said in an interview. “It’s hard to argue that these bonds are overvalued when inflation and resource utilisation rates remain very low, and the unemployment rate is high.”
The Federal Open Market Committee’s Sept. 21 statement said it “will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery.”
The Fed’s statement indicates it’s focused on an inflation level below the preferred long-term range as the main reason to provide additional stimulus. Consumer prices excluding food and fuel costs rose 0.9 percent in August from a year earlier, matching the smallest increase since the 1960s.
The Fed retained its policy, begun last month, of reinvesting proceeds from mortgage debt repayments into long- term Treasuries. It has bought $34 billion since it began the program on Aug. 17. Policy makers also kept the benchmark federal funds rate in a range of zero to 0.25 percent, where it’s been since December 2008, and reiterated the rate will stay “exceptionally low” for an “extended period.”
Japanese Intervention
Other factors that may also push Treasury yields lower include the consequences of intervention in the currency market by the Bank of Japan, said Wadhwa. Earlier this month, Japan intervened in the foreign-exchange market for the first time since 2004 after the yen’s advance to a 15-year high against the dollar threatened to stunt the nation’s economic recovery.
“The Bank of Japan bought a significant amount of dollars during the forex intervention, and may do another round,” said Wadhwa. “They will need to invest these dollars somewhere. I suspect they will end up investing in Treasuries.”
The yield on the 10-year U.S. Treasury declined 4 basis points to 2.56 percent as of 11:45 a.m. in London. The two-year note yield was down 2 basis points to 0.43 percent.
To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net
To contact the editor responsible for this story: Dan Tilles at dtilles@bloomberg.net
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