Fed May `Ease,' Though Form Debatable, Nomura Says
Nomura Holdings Inc., one of the 18 primary dealers that trade with the Federal Reserve, said policy makers will “ease” at their Aug. 10 meeting, though what form it takes is debatable.
Central bankers may change the language of their policy statement to signal that the Fed’s balance sheet will remain expanded and change policy on the mortgage program to start reinvesting paydowns, the firm said in a note to clients today. There is also a chance of other actions, such as a cut in the rate on excess reserves, Nomura’s global economics team said.
Nomura changed its viewpoint because of a softening of the comments from policy makers such as Philadelphia Fed President Charles Plosser and St. Louis Fed President James Bullard. The firm also cited the Fed’s downward revision for growth and the slack in the economy that threatens to push inflation to an unacceptably low level for Fed Chairman Ben S. Bernanke.
“Easing is going to be very seriously considered given several months of disappointing data and the very dovish tone of public commentary across the spectrum,” said Zach Pandl, an economist at Nomura Securities International in New York. “If the Fed is averse to buying more assets, then cutting the rates of interest on reserves could be the next option.”
Bullard said yesterday that the central bank should resume purchases of Treasury securities if the economy slows and prices fall rather than maintain a pledge to keep rates near zero.
‘Lower for Longer’
The Fed signaled last month that Europe’s debt crisis may harm U.S. growth and repeated a pledge to keep interest rates near zero “for an extended period.” The central bank cut the benchmark interest rate almost to zero in December 2008 and turned to purchases of Treasury, housing-agency and mortgage- backed securities as the main tool for monetary policy.
“The main effect would be to change expectations about where policy is headed,” Pandl said. “It will be more ‘lower for longer.’ It will be to lower market expectations for tightening in the next year. The shift would affect those expectations.”