Former Fed Governor Meyer Reduces Forecast for Bond Purchases

Former Federal Reserve Governor Laurence Meyer reduced his forecast for the central bank’s bond purchases, saying the Fed will stop at $600 billion in June because of faster U.S. growth.

The odds of Congress enacting an $858 billion plan to extend all Bush-era tax cuts are rising, and recent economic data have been surprisingly strong, raising the chance of a 5 percent pace of expansion in late 2011, Meyer and Antulio Bomfim said yesterday in a note to clients of Macroeconomic Advisers LLC. Meyer, based in Washington, co-founded the firm and is its vice chairman.

Meyer, 66, previously projected the Fed would extend buying into the second half of 2011 and expand the program to $1 trillion, an estimate that he marked down from an earlier forecast of $1.5 trillion. Yesterday, the Federal Open Market Committee voted to keep its Nov. 3 plan to expand record monetary stimulus through Treasury purchases, saying the recovery hasn’t been strong enough to reduce joblessness.

“In addition to fiscal stimulus, the incoming data have, on net, continued to surprise to the upside,” Meyer and Bomfim said in the note. At the same time, “the hurdle for stopping before the full $600 billion of purchases are completed is very high,” they said.

The Fed will begin to raise interest rates at its January 2012 meeting, Meyer and Bomfim said in yesterday’s note, changing the forecast for the first tightening from mid-2012. While the initial rate increase is likely to be a quarter-point rise in the 0.25 percent rate paid on excess reserves, “some decisions could well involve larger increases in overnight rates,” they said.

“The FOMC will not telegraph any intention to raise rates at a ‘measured pace,’” the economists said, referring to the Fed’s practice of raising the benchmark federal funds rate in quarter-point steps from 2004 to 2006.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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