Fed's Next Steps as Asset Purchases Wind Down Divide Economists in Survey
Federal Reserve policy makers are almost certain to fulfill their plan to buy $600 billion in Treasuries, a survey of economists shows. How they finish the purchases and what they do next is a matter of disagreement.
Of 50 economists surveyed by Bloomberg News last week, 49 said the Fed will buy the full amount of bonds in a bid to boost the economy. Thirty-one said the central bank won’t adjust the pace or duration of the purchases, as it did in the first round of so-called quantitative easing in 2009-10. Respondents were further divided over how long the Fed will keep its bond portfolio stable after the purchases end, with a plurality of 16 betting on a period of four to six months.
The variance of opinion reflects differing assessments of the strength of the U.S. recovery, said Scott Brown, chief economist at Raymond James & Associates Inc. It also shows “uncertainty” about the benefits of the Fed’s policy of reinvesting maturing debt into new securities, which began in August, said Kurt Karl, chief U.S. economist at Swiss Reinsurance Co. in New York.
“You’ve seen the same kind of divisions amongst senior Fed officials,” said Brown, who is based in St. Petersburg, Florida. “Some are more worried about the possibility of higher inflation. Some are more worried about the amount of slack in the economy and believe that amount of slack is going to keep inflation mostly contained.”
The Federal Open Market Committee, led by Chairman Ben S. Bernanke, began a one-day meeting at 8:30 a.m. today in Washington and will issue a statement at about 2:15 p.m. Two years after they first pledged to keep the benchmark interest rate near zero for an “extended period,” Fed policy makers will retain that language today, according to 45 respondents in the survey.
Bernanke has signaled he’s in no rush to tighten credit after the Fed finishes an expansion of record monetary stimulus, seeing little inflation risk and still-slow job growth. The chairman on March 1 told lawmakers that he needs to see “a sustained period of stronger job creation” before he deems the recovery firmly established.
While U.S. employers added 192,000 workers in February, driving the unemployment rate below 9 percent for the first time in almost two years, joblessness is still about double prerecession levels. The Fed’s preferred inflation gauge, which excludes food and energy, was the lowest in five decades during December and January, and Bernanke said this month he doesn’t expect a permanent boost to prices from the recent surge in commodity costs.
Higher energy costs risk limiting consumer spending, which could affect the timing of policy tightening, Brown said. Consumer confidence fell last week by the most since October 2008, the Thomson Reuters/University of Michigan index of sentiment showed last week.
Atlanta Fed President Dennis Lockhart said in a March 7 speech that he doesn’t expect consumer-price inflation to accelerate because of the rise in food and energy costs. Speaking to economists in Arlington, Virginia, Lockhart said he is “very cautious” about further asset purchases, while not ruling out the possibility because turmoil in the Middle East and Africa risks slowing the U.S. economy.
Chris Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ Ltd., was the only respondent to say the Fed will stop short of $600 billion in asset purchases it has said it will buy through June. He said prospects for the economy have improved enough since Bernanke signaled on Aug. 27 that the Fed would restart purchases.
‘Night and Day’
“It’s night and day in terms of what the economy looked like last year when they started floating the idea of QE2,” said Rupkey, who is based in New York.
The Standard & Poor’s 500 Index rose 22 percent from Aug. 27 through yesterday, and the risk premium on high-yield, high- risk bonds has narrowed to 4.88 percentage points from 6.81 percentage points, Bank of America Merrill Lynch data show.
It’s probably too early to judge how the March 11 earthquake in Japan, which disrupted cooling systems at three nuclear reactors, will affect the thinking of Fed officials on monetary policy, said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut.
“It certainly introduces yet another wild card or potential risk,” said Stanley, a former Richmond Fed researcher. “Unless this nuclear situation takes a big turn for the worse, my guess is that the impact on the global economy will be relatively limited.”
U.S. stocks tumbled today, following a plunge in equities in Tokyo, as Japan’s government battled to cool the damaged reactors. The Standard & Poor’s 500 Index fell 2 percent to 1,271 at 9:32 a.m. in New York.
The Bloomberg News survey, conducted March 7-10, found the majority of respondents don’t expect the Fed to adopt a strategy of tapering off asset purchases, as it did with the $1.7 trillion first round. Bernanke opted in 2009 to gradually complete the end of those purchases of Treasuries and mortgage debt to promote a “smooth transition” in markets.
“This time around, I think the economy’s just in much better shape” to forgo tapering, said Swiss Re’s Karl.
Brown, who expects tapering, said the Fed will consider the impact in financial markets of a sudden drop-off in purchases, the so-called “cliff effect.”
“Perhaps the ‘cliff effect’ isn’t quite as significant as many people feared earlier, but I still think they would probably taper it off to some extent, just so there aren’t going to be any disruptions,” Brown said.
The survey’s widest spread of opinions dealt with how long the Fed will retain the policy of reinvesting maturing debt after finishing the $600 billion of Treasury purchases.
Five of 50 respondents said the Fed would halt the policy once QE2 ends; 11 said it would keep reinvesting for one to three months; 16 said four to six months; 14 said seven to nine months; and four said more than nine months.
The variance owes to the complexity of the Fed’s exit tools, including asset sales and interest rates, Rupkey said. “That’s why you have greater divergence here.” In addition, economists are divided over how the Fed should respond to the size of the gap between the economy’s actual performance and its potential, he said.
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