Fed Bond-Buying Seen Less Likely After Best Six-Month Job Gains Since 2006
The best six months of job gains since 2006 have helped reduce the odds of a third round of asset purchases by the Federal Reserve, according to a Bloomberg News survey of economists.
Sixty-one percent of respondents in a March 9-12 poll said Chairman Ben S. Bernanke will refrain from any action to expand the Fed’s $2.89 trillion balance sheet this year. In January, 50 percent of those surveyed predicted more bond buying.
Bernanke, in Senate testimony before a March 9 jobs report, gave no sign he’s considering a new program of so-called quantitative easing. Still, he repeated that the main interest rate is likely to stay near zero through at least late 2014 to boost a job market that remains “far from normal.” The Federal Open Market Committee plans to release a statement at about 2:15 p.m. today after its meeting in Washington.
“They’ve seen a good bit of job growth and they weren’t seeing that when they did QE1 and QE2,” said Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh. “Job gains will probably stay fast enough that the Fed will feel the drop in the unemployment rate wasn’t a fluke,” he said.
None of the 49 economists in Bloomberg’s survey anticipate that the Fed will announce new asset purchases today. In January, 14 percent predicted an announcement today.
If the Fed eventually eases further, economists are split on whether it would purchase bonds while taking steps to ensure such a move doesn’t increase inflation pressures. Thirty percent of economists say the Fed would “sterilize” the impact of its purchases by using repurchase agreements and term deposits to prevent new money from entering the economy.
Vincent Reinhart, the chief U.S. economist at Morgan Stanley and a former monetary economist at the Fed until 2007, said the odds are even that the Fed will launch a new program of asset purchases. The central bank would help gain public acceptance of new bond-buying by blunting the probability such a measure will speed up inflation, he said.
“They can say they’re trying to foster both parts of the dual mandate by buying long-term and mortgage-backed securities in support of the full-employment objective, but sterilizing the effect on the balance sheet to preserve price stability,” he said in a March 7 interview. “I find it pretty unlikely we’d get this in March,” he said.
Reinhart sees a one-in-four chance the Fed will extend its current “Operation Twist” program in which it buys longer-term securities and sells a corresponding amount of short-term securities, according to a March 5 research note. The Fed is scheduled to complete the program in June.
The central bank is in no rush to tighten policy, even if inflation breaches its 2 percent goal for price increases, economists said in the survey.
Asked how much inflation the Fed would tolerate to bring unemployment down from a level of 8 percent or more, 39 percent of economists said the Fed would allow a 3 percent to 3.5 percent increase in the personal consumption expenditures index. The jobless rate was 8.3 percent in February.
Another 31 percent of respondents looked for a 3.5 percent to 4 percent rise, and 12 percent said prices would have to rise more than 4 percent to prompt Fed action.
Prices increased 2.4 percent from a year earlier in January, above policy makers’ 2 percent target announced at their Jan. 24-25 meeting. Excluding food and energy, prices rose 1.9 percent.
Higher Oil Prices
Rising oil prices will probably push up the index temporarily, Bernanke said to lawmakers this month in his semiannual monetary policy report to Congress. The national average price for a gallon of gasoline was $3.80 on March 11, according to the American Automobile Association.
Bernanke has previously advocated holding policy steady as price shocks drove inflation higher. In September 2007, capacity utilization rose to 81.3 percent, the highest since a recession that ended in November 2001. Unemployment averaged 4.5 percent in the first six months of the year. Inflation exceeded policy makers’ implicit target, with the PCE price index’s annual rates averaging 2.5 percent during the first six months.
Still, the FOMC left the benchmark lending rate at 5.25 percent until Sept. 18, 2007, when it cut the rate by half a point as the financial crisis began to unfold.
“The higher gas prices go, the less the Fed is likely to worry about inflation because it’s a damping effect on economic activity,” said Donald Ellenberger, a portfolio manager at Pittsburgh-based Federated Investors Inc. whose $791.2 million U.S. Government Securities Fund for two- to five-year bonds has outperformed 96 percent of rivals over the past five years.
Investors expect prices to rise 2.29 percent over the next 10 years, as measured by the spread between Treasury Inflation Protected Securities and nominal bonds. That’s up from a 2011 low of 1.67 percent.
The expectation inflation will exceed 2 percent “doesn’t suggest that the market is losing confidence in the Fed being able to contain inflation,” Ellenberger said.
The yield on the 10-year Treasury note has risen to 2.03 percent from 1.88 percent at the start of 2012. Low Treasury yields have helped keep mortgage-rates near record lows. The average 30-year mortgage in the U.S. was 3.88 percent on March 8, according to a Freddie Mac index, compared to a record low of 3.87 reached last month.
Low mortgage rates are helping to boost expectations for higher sales at home builders. The Standard & Poor’s Supercomposite Homebuilding Index has risen 25 percent so far this year, almost triple the 9 percent increase in the S&P 500. Sentiment among builders in March rose to the highest level since May 2007, according to a National Association of Home Builders index.
“From a macroeconomic perspective, things definitely feel better right now,” Ara Hovnanian, chairman and president of Hovnanian Enterprises Inc. (HOV), the largest home builder in New Jersey, said in a March 7 earnings call. “There are more positive trends than negative trends grabbing the headlines. Mortgage rates remain low. The energy sector is booming. There are fewer discussions about fears of a double-dip recession.”
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