Federal Reserve Asset Buying May Reach $2 Trillion, Goldman's Hatzius Says
The Federal Reserve may purchase $2 trillion of assets to stimulate the U.S. economy and start by announcing a fresh round of monetary easing on Nov. 3, Goldman Sachs Group Inc. said.
“We expect an announcement of $500 billion or perhaps slightly more over a period of about six months,” Jan Hatzius, the New York-based chief U.S. economist at Goldman Sachs, said in an e-mailed note. “The key question, however, is not the size of the first step, but how far Fed officials will ultimately need to move to achieve their dual mandate of low inflation and maximum sustainable employment.”
The world’s largest economy grew at a 2 percent annual pace in the third quarter, according to the median estimate of economists surveyed by Bloomberg News before the Commerce Department’s Oct. 29 report on gross domestic product. That’s unlikely to be strong enough to give the 14.8 million unemployed Americans hope of finding work soon, one reason why Fed policy makers may be about to pump more money into the economy.
The Fed is “almost certain” to announce additional monetary easing next month, Hatzius said. The committee may also announce a monthly purchase rate of perhaps $100 billion that will remain in place until the outlook for jobs and inflation improve “significantly,” he wrote.
The cost of living in the U.S. rose less than forecast in September a report showed Oct. 15, indicating companies are keeping a lid on price increases to stoke demand. The consumer- price index rose 0.1 percent, compared with projections for a 0.2 percent gain, Labor Department figures showed.
Goldman Sachs estimates that the “zero bound” has kept the Fed funds rate about 700 basis points too high to achieve the central bank’s desired inflation and unemployment levels. Easy fiscal policy, the Fed’s first round of asset purchases and the central bank’s commitment to hold the benchmark interest rate near zero for an extended period have reduced that gap by 400 basis points, Hatzius wrote. A basis point is 0.01 percentage point.
Goldman estimates that as much as $4 trillion of additional large-scale asset purchases might be needed to bring inflation and unemployment into line with the Fed’s targets. That’s based on projections that $1 trillion in asset purchases equates to a 75 basis point cut in the benchmark rate, Hatzius said in the note dated Oct. 22.
The Fed is unlikely to buy that much unless the economy gets much worse, Hatzius said. The key U.S. rate has been in a range of zero to 0.25 percent since December 2008.
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