Royal Bank of Scotland Group Plc.’s William O’Donnell, head of the lender’s U.S. treasury strategy, said he sees a 60 percent chance that the Federal Reserve will begin cutting its $85 billion monetary stimulus plan in March.
“We have never waivered from March being the earliest window for tapering,” O’Donnell, also RBS’s co-head of markets strategy for the Americas, said in an interview in Dubai yesterday. A cut in the bond buying program won’t significantly push up the benchmark U.S. interest rate, he said.
Fed Chairman Ben Bernanke said yesterday in a speech to economists in Washington that the Fed will probably hold down its target interest rate long after ending the monthly bond buying, and possibly after unemployment falls below 6.5 percent. Policy makers are debating how to slow the pace of asset purchases without causing a surge in interest rates that could jeopardize the more than four-year economic expansion.
Since lowering the benchmark interest rate to near zero in December 2008, Fed officials have relied on bond buying and forward guidance to try to spur growth. They’ve suggested pushing back the timeline for rate increases, emphasizing they won’t raise borrowing costs until inflation climbs, or lowering the interest they pay on the cash that banks park at the central bank as ways to add stimulus.
“In the backdrop of still perniciously low inflation, the yield curve will act as a tether on long-end rates, through at least 2014,” Stamford, Connecticut-based O’Donnell said. “We see relatively benign inflation, relatively benign growth.”
The Fed probably won’t taper purchases until its March 18-19 policy meeting, according to the median of 32 economist estimates in a Bloomberg News survey Nov. 8.
The policy-setting Federal Open Market Committee’s Sept. 18 decision not to taper monetary stimulus surprised investors. On June 19, Bernanke said he might trim the pace of securities purchases this year and halt them by mid-2014.
The yield difference between the two and 10-year Treasury note is near a historical high and a rise in the 10-year interest rate will require the yield curve to be at its steepest in many decades, which is unlikely, O’Donnell said. He forecast the 10-year yield to be at 2.8 percent to 2.85 percent by the middle of next year and at around 3 percent by end-2014.
U.S. prices are accelerating at a 0.9 percent annual rate, the personal-consumption-expenditures price index showed in September, short of the Federal Reserve’s 2 percent goal.
U.S. economic growth will slow to 1.7 percent this year from 2.8 percent in 2012, and then accelerate to 2.6 percent in 2014, according to the median estimate of 74 economists.
The Fed is buying $85 billion of mortgage-backed securities and Treasuries each month as part of a plan to keep interest rates low and spur growth. The yield on the benchmark 10-year Treasury note climbed to as high as 2.99 percent on Sept. 5, from 1.93 percent on May 21, after Fed Chairman Ben Bernanke fuelled expectations in May and June of the September cut. The 10-year note yield quoted at 2.72 percent today.
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