Fed Seen Forgoing New Bond Buying Program Until September

Federal Reserve Chairman Ben S. Bernanke will probably forgo announcing a third round of large- scale asset purchases this week, and is more likely to wait until September to unveil plans to buy $600 billion in housing and government debt, according to median estimates of economists in a Bloomberg News survey.

Eighty-eight percent of economists say the Federal Open Market Committee will refrain from starting new purchases at a two-day meeting that began today in Washington. Forty-eight percent say the FOMC will announce the buying at its Sept. 12-13 meeting, according to the July 25-27 survey of 58 economists.

The FOMC may take further action should the job market not make “sustained progress” in bringing down an unemployment rate stuck above 8 percent for 41 consecutive months, Bernanke said this month in congressional testimony. The FOMC wants to see more jobs data before beginning asset purchases aimed at holding down borrowing costs, spurring growth and reducing unemployment, said Michael Gapen, senior U.S. economist for Barclays Plc in New York.

Policy makers “don’t need to do something immediately because the economy is basically treading water,” with a second quarter growth rate of 1.5 percent, Gapen said. “What gives the Fed the ability to sit tight for now is financial market conditions haven’t weakened that much.”

Rather than increase asset purchases this week, the Fed is more likely to extend its pledge to hold its main interest rate near zero beyond its current horizon of late 2014. Twenty-six percent of economists expect the central bank to announce a later date, while 74 percent of economists expect the Fed not to change its forward guidance, according to the survey.

Trigger Finger

“There’s nothing that really suggests the Fed has an itchy trigger finger or that they’re champing at the bit to ease policy again,” said Paul Edelstein, director of financial economics for IHS Global Insight in Lexington, Massachusetts.

By waiting to step up stimulus until September, when Bernanke is scheduled to hold a press conference and policy makers will update forecasts for growth and unemployment, the FOMC can “give some guidance to markets and link it directly to their outlook for the economy,” he said.

The Labor Department plans on Aug. 3 to release its payrolls report for July. The report is likely to show that employers added 100,000 jobs this month, according to the median forecast in a separate survey of economists, compared with the 80,000 increase in June.

New Purchases

Asked to estimate the size and composition of new asset purchases, 34 of 48 economists said a new round of quantitative easing will consist of mortgage-backed securities and Treasury securities. Thirteen of the 48 economists said the purchases would consist entirely of mortgage-backed securities.

The median estimate was for purchases totaling $600 billion, the same size as the second round of asset purchases announced in November 2010. Economists predict the purchases will be split evenly between Treasuries and mortgage debt.

“In general their preference is to use Treasuries rather than mortgages, but at this point they’re owning more and more of the Treasury market, so there’s reason to spread it out,” said Jim O’Sullivan, chief U.S. economist for High Frequency Economics in Valhalla, New York.

Global stocks rallied last week as European Central Bank President Mario Draghi said July 26 he is prepared to do “whatever it takes to preserve the euro.”

Index Rises

Since Draghi’s remarks, the MSCI World Index rose 4.2 percent and the S&P 500 has increased 3.2 percent. The S&P 500 fell 0.3 percent to 1,381.02 today as of 1:58 p.m. The index is up 9.8 percent this year.

Fed officials have identified Europe as one of “two main sources of risk,” Bernanke said in his testimony to Congress this month. The other risk is the so-called fiscal cliff, about $600 billion of spending cuts and tax increases that are scheduled to go into effect at the end of the year unless Congress acts.

Bernanke cited a Congressional Budget Office estimate that the full range of spending cuts and tax increases would knock the U.S. into a “shallow recession” in 2013.

“We are seeing demand being relatively stable,” Jim Compton, chief revenue officer of United Continental Holdings Inc., said in a July 26 earnings call. His company is the world’s largest carrier.

‘Watching Softness’

“When we talk about the economy being tepid, we are very much aware of, particularly Europe, and are keeping our eyes on that,” he said. “We’re obviously watching softness in the economy to see where that turns.”

While lawmakers may not resolve U.S. fiscal challenges until after the Nov. 6 election, economists don’t believe the Fed will alter its stimulus based on the political calendar, according to the survey.

Sixty-five percent of the economists surveyed believe the Fed won’t be influenced by politics as it weighs whether to start a new round of bond purchases. Eighteen percent say the Fed will be more likely to act before the election, while the same proportion say the Fed would be more likely to wait until after Nov. 6.

Bernanke testified on July 17 that the prospect for more stimulus hinges on job creation and the outlook for inflation.

“It’s very important that we see sustained progress in the labor market and avoid deflation risk,” he said. “Those are the things we’ll be looking at as the committee meets later this month and later this summer.”

All Items

Inflation, excluding food and energy, was 1.8 percent in the year through June, according to the Commerce Department’s personal consumption expenditures index released today. Including all items, prices rose 1.5 percent during the period.

While inflation is below the Fed’s 2 percent target, market expectations for price gains have increased since the Fed began a second round of asset purchases and started so-called Operation Twist, a program to extend the average duration of securities in the Fed’s portfolio.

Traders in inflation protected securities predict inflation of 2.1 percent over the next 10 years. That compares with 1.5 percent in August 2010, when Bernanke signaled the Fed may initiate a second round of quantitative easing, and 1.7 percent in September of 2011, when the Fed started Operation Twist.

The Fed chairman said the central bank’s tools for easing policy include further purchases of Treasuries and mortgage- backed securities, altering the Fed’s language on the outlook for interest rates and reducing the rate the Fed pays banks on excess reserves.

Economists believe the Fed is unlikely to lower the interest rate on excess reserves. Four percent expect such a move this week, while 14 percent see the Fed doing so in September. Seventy-four percent of economists say the Fed won’t use the policy tool.

To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net

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

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