Fed Seen Extending Operation Twist and Avoiding Bond Buys
The Federal Reserve will probably decide today to expand Operation Twist beyond $400 billion to spur growth and buy protection against a deeper crisis in Europe, according to a Bloomberg News survey of economists.
Fifty-eight percent of respondents in a June 18 poll said the Fed will prolong the program, which seeks to lower borrowing costs by extending the average maturity of the securities in the central bank’s portfolio. The current program ends this month.
Policy makers led by Chairman Ben S. Bernanke may conclude that growth is too feeble to reduce unemployment much further after payroll growth came close to stalling in May. At the same time, with inflation close to their 2 percent goal and the Greek election reducing the risk of a euro breakup, they may decide an additional round of quantitative easing isn’t needed for now, economists said.
“Extending Operation Twist is the path of least resistance,” said Josh Feinman, the New York-based global chief economist for DB Advisors, the Deutsche Bank AG asset management unit that oversees $232.1 billion. “It would be an extension of something we have in place, so it would be more seamless, and it doesn’t complicate exit strategies as much because it’s not expanding the balance sheet,” said Feinman, a former senior economist for the Fed Board in Washington.
The Federal Open Market Committee, which ends its two-day meeting today, will repeat in a statement that subdued inflation and economic slack will probably warrant “exceptionally low” interest rates through at least late 2014, according to 89 percent of the economists surveyed. The statement is set for release at around 12:30 p.m. in Washington. Sixty percent said the Fed probably won’t start a third round of large-scale bond purchases, or quantitative easing.
The Fed at 2 p.m. will release policy makers’ forecasts for unemployment, inflation and the expected path of the federal funds rate over the next several years. Bernanke plans to hold a press conference at about 2:15 p.m.
Bank of England Governor Mervyn King was overruled for the first time in almost three years today as he joined a push to expand stimulus that’s gathering momentum as the danger of Europe’s debt crisis intensifies. The Monetary Policy Committee voted 5-4 to keep its bond-purchase target at 325 billion pounds ($511 billion) this month. That defeated votes by King and two other committee members for a 50 billion-pound expansion.
Treasuries returned 3.3 percent from the end of March to June 18, according to Bank of America Merrill Lynch’s Treasury Master index, amid concern Europe’s debt crisis was worsening and U.S. growth was slowing. The Standard & Poor’s 500 Index lost 4.1 percent, after taking account of reinvested dividends.
Since the Fed announced Operation Twist on Sept. 21, the yield on the 10-year U.S. Treasury note fell to 1.62 percent yesterday from 1.86 percent. It fell to a record low 1.4387 on June 1.
Stocks rose yesterday, sending the S&P 500 to the highest level in a month on speculation the Fed will announce steps to boost the economy. S&P 500 futures expiring in September climbed 0.2 percent to 1,353.80 as of 7:30 a.m. in New York.
So far under the $400 billion maturity-extension program, the Fed has shifted about $383 billion into longer-term bonds. The central bank has about $190 billion of debt with short-term maturities for continuing Operation Twist for another three months, according to calculations by Nomura Securities International Inc.
Should the Fed extend the program beyond this month, it may shift into mortgage-backed securities, in a bid to reduce the average 30-year home-loan rate from the 3.71 percent level of last week, said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh.
“The economy still needs monetary stimulus, though QE3 seems to be a bridge too far,” he said. “Extending Operation Twist signals the Fed is on the job, yet it is not as aggressive as quantitative easing.”
Seventy-one percent of economists surveyed said the election in Greece won’t influence Fed policy, while 22 percent said the vote favoring pro-bailout parties reduced the probability of more accommodation. Sixty four economists responded to the survey.
Monthly employment gains have decelerated from a high this year of 275,000 in January. U.S. payrolls rose 69,000 in May after a 77,000 increase in April, according to data from the Labor Department. The jobless rate climbed to 8.2 percent in May from 8.1 percent the month before.
Target Corp. Chief Executive Officer Gregg Steinhafel said on a conference call last month that the Minneapolis-based retailer remains “cautious” about the U.S. expansion and is planning its business on an assumption that “the current economic recovery will continue to be slow and uneven.”
Retail sales fell 0.2 percent in May, following a similar decline in April, the U.S. Commerce Department said June 13. Sales excluding automobiles slumped by the most in two years.
Those results followed a series of disappointing annual profit forecasts from consumer companies. Procter & Gamble Co., Tiffany & Co., Lowe’s Cos. and Tempur-Pedic International Inc. cut their projections, while predictions from Lululemon Athletica Inc., Limited Brands Inc., Macy’s Inc. and Clorox Co. (CLX) trailed analysts’ estimates.
“There is too much uncertainty not to extend Operation Twist,” said Diane Swonk, chief economist in Chicago at Mesirow Financial Inc., which oversees about $61.7 billion in assets. “They need to signal their willingness to ease fairly strongly.”
Atlanta Fed President Dennis Lockhart, who votes on policy this year, described the economy in a June 6 speech as “underwhelming” and the job reports as “disappointing.” The option of prolonging Operation Twist is “on the table” he said.
The FOMC in it is post-meeting statement could voice more willingness to buy bonds if necessary, saying that it “stands ready” to adjust its balance sheet rather than that it “is prepared,” said Michael Hanson, a senior U.S. economist at Bank of America Corp. in New York.
The Fed reduced its benchmark interest rate almost to zero in December 2008 and later bought $2.3 trillion in securities in a bid to push longer-term borrowing costs lower. In January, it said it would keep rates near zero at least through late 2014, extending an earlier pledge of mid-2013.
The Fed started Operation Twist in September. Unlike with quantitative easing, the program doesn’t increase its balance sheet. Instead, the Fed sells short-term debt and uses the proceeds to buy longer-term bonds. By keeping its assets stable, the Fed can more easily “exit” from record accommodation when the time comes.
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