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Fed Likely to Keep Rates Low, Affirm Asset Floor, Survey Shows

Federal Reserve Chairman Ben S. Bernanke
Ben S. Bernanke, chairman of the U.S. Federal Reserve. Photographer: Andrew Harrer/Bloomberg

The Federal Reserve next week is likely to affirm its pledge to keep interest rates low for an “extended period” and maintain the floor on its holdings of securities, say economists surveyed by Bloomberg News.

The Fed’s Open Market Committee at its Sept. 21 meeting will hold off from expanding the balance sheet by purchasing securities, according to 60 of 64 analysts surveyed Sept. 16-17. Fifty-four of 63 economists said the Fed will leave unchanged a sentence saying high unemployment and low inflation warrant “exceptionally low” rates for an “extended period.”

The survey indicates that even with the economy slowing for two quarters and unemployment persisting at 9.5 percent or higher for the past year, Fed Chairman Ben S. Bernanke may need more time to decide if additional stimulus is needed to support a rebound in growth. A few respondents said the Fed may say next week it’s prepared to take action as needed.

“Bernanke has indicated a willingness for the Fed to do more to support economic growth, but it’s really conditional on a much more substantial deterioration in the economic outlook,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida. Brown expects no change in Fed policy or the “extended period” language on Sept. 21.

By a 59-4 count, economists expect the Fed to leave unchanged at 0.25 percent the interest rate it pays on banks’ reserve deposits with the central bank.

Setting a Floor

At the last FOMC meeting on Aug. 10, Fed policy makers voted 9-1 to stop letting the balance sheet contract because of a projected $400 billion of payments on mortgage debt held by the Fed through the end of 2011. The central bank began purchasing Treasuries to keep a $2.05 trillion floor on holdings. The decision ran counter to some analyst forecasts.

Nomura Securities International Inc. chief economist David Resler, who correctly predicted the Aug. 10 decision, said in a research report yesterday that the Fed “should and will authorize an increase in its securities portfolio target” at next week’s meeting.

The move may come in the form of buying as much as $200 billion of additional securities until the next FOMC meeting Nov. 2-3, Resler said in an interview.

“The data have been not uniformly weak but consistently weak,” Resler said. With economists, and probably the Fed, reducing economic-growth forecasts since the last FOMC meeting, “there would be no question they would be easing” by cutting the federal funds rate if the Fed could do so, Resler said. He wasn’t one of the survey respondents.

Preconditions in Place

Bernanke, in an Aug. 27 speech in Jackson Hole, Wyoming, said the “preconditions” for higher 2011 growth are “in place.”

At the same time, he outlined the pros and cons of three policy tools to boost growth if the outlook worsens: asset purchases, changes to the low-rate pledge and reducing the rate on reserve deposits. A possible downside of asset purchases is reduced public confidence, “even if unjustified,” in the Fed’s ability to exit from its unprecedented expansion of credit.

“The potential benefits at this point do not seem to outweigh the potential costs,” Brown said.

A report yesterday showed confidence among U.S. consumers unexpectedly dropped to a one-year low in September. U.S. stocks, meantime, have rebounded in recent months, with the Standard & Poor’s 500 Index gaining about 9 percent so far this quarter.

‘Significant Impact’

“The options alluded to at Jackson Hole are most important in providing the illusion of significant monetary-policy potential options,” said survey respondent Jason Schenker, president of Prestige Economics LLC in Austin, Texas. “They’re not necessarily options that could truly be implemented to have significant impact in an immediate-term kind of way without potential long-term consequences.”

Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said the FOMC may take a step closer to increasing asset purchases even without changing policy at this meeting.

“They may insert a line saying they are evaluating the potential benefits of buying longer-term securities, but they won’t announce the start of any such purchases,” Rupkey said.

The questions were as follows:

1. At the FOMC’s Sept. 21 meeting, will the committee decide to (choose one):

a) Retain the current policy of keeping a constant level of the Fed’s securities holdings by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities

b) Increase the level of securities holdings through an accelerated pace of asset purchases

c) take a different action on the balance sheet. Please be specific.

Result (64 replies): A, 60; B, 3; C, 1.

2. Will the FOMC statement following the Sept. 21 meeting include any changes to the following sentence: “The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” Yes or no.

Result (63 replies): Yes, 9; 54, no.

3. Will the Fed decide at the Sept. 21 meeting to reduce the 0.25 percent interest rate on excess reserves? Yes or no.

Result (63 replies): Yes, 4; 59, no.

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