Fed Now Seen Starting to Taper Bond Buying in December
Most economists surveyed now say the Federal Reserve will begin tapering asset purchases in December after Chairman Ben S. Bernanke reset the central bank’s timeline by maintaining the pace of bond-buying earlier this week.
Twenty-four of 41 economists surveyed Sept. 18-19 said the Fed will now wait until December before taking the first step in slowing its $85 billion in monthly bond purchases, according to a Bloomberg survey. The median estimate in an Aug. 9-13 poll projected the Fed would begin paring at this week’s meeting.
Instead, the Federal Open Market Committee opted to press on with asset purchases, saying it was dissatisfied with progress in the labor market. Policy makers’ surprising extension of the program sent stocks to record highs and triggered the biggest rally in Treasuries since 2011 as investors repositioned for a more accommodative central bank.
“They cannot continue going full speed forever because the larger the balance sheet, the more FOMC members will become uncomfortable,” said Roberto Perli, a partner at Cornerstone Macro LP in Washington and a former Fed economist. Perli said the Fed’s meeting in December is the earliest it could revisit the decision to press on.
Federal Reserve Bank of St. Louis President James Bullard in an interview today on Bloomberg Television held out the chance that policy makers could decide as early as next month to begin slowing the pace of bond purchases.
“This was a close decision here in September, so it’s possible you could get some data that change the complexion of the outlook and could make the committee be comfortable with a small taper in October,” Bullard said. “It’s possible, but I’m not saying it will happen. You have other meetings after that.”
Federal Reserve Bank of Kansas City President Esther George, who has consistently dissented against additional stimulus, today said financial markets were prepared for a reduction in bond purchases, so the central bank should have followed through.
“Clearly the actions at this meeting, and the expectations that had been set relative to how markets were thinking about this, created confusion, created a disconnect,” George said in a New York speech to the Shadow Open Market Committee, a group of economists that critiques Fed policy.
Stocks fell, sending benchmark indexes to their biggest decline since August, as concerns grew about the timing of Fed stimulus cuts and political wrangling over federal spending. The Standard & Poor’s 500 Index dropped 0.7 percent, the most since Aug. 27, to 1,709.92 at the close in New York.
While Fed policy makers held the line on monetary policy this week, India’s central bank Governor Raghuram Rajan surprised analysts by raising the benchmark interest rate in his first policy review, seeking to rein in inflation that’s dimmed economic prospects.
In Britain, the economic revival helped reduce the country’s budget deficit last month as tax income climbed and the government cut spending. Net borrowing excluding temporary support for banks was 13.2 billion pounds ($21.2 billion) compared with 14.4 billion pounds a year earlier, the Office for National Statistics said today.
While the central bank meets on Oct. 29-30, policy makers will have received just one new monthly jobs report from the Labor Department.
The latest payroll figures showed employers added 169,000 jobs in August, less than the median forecast of economists and following gains in the prior two months that were revised down. The Fed forecasts the economy will strengthen later this year, and in 2014 projects growth of 2.9 percent to 3.1 percent, according to estimates released at their meeting. Gross domestic product has advanced an average 1.8 percent in the first half of the year.
“We’ll be looking to see if the data confirm that basic outlook,” Bernanke said in his press conference following the conclusion of the Fed’s meeting. “If it does, we’ll take a first step at some point, possibly later this year.”
The Fed’s third round of quantitative easing began in September 2012 and central bankers pledged to continue purchases until achieving “substantial improvement” in the labor market. So far they’ve purchased $386.8 billion of Treasuries and $463 billion of mortgage bonds, for a total of $849.8 billion.
Three of the 41 economists surveyed by Bloomberg project the Fed will wait until March before deciding to shrink the program. Four project central bankers will slow the pace of purchases in October, while five said they will wait until the meeting in January.
“Had we been looking at job growth of 200,000 or more and growth closer to 2.5 percent or 3 percent” the central bank may have tapered this week, said Millan Mulraine, director of U.S. rates research at TD Securities USA Inc. in New York. Unless data show employment and the economy improving, the central bank may not begin reducing purchases until March, he said.
“I don’t think we’re going to be in the environment in December where we have a substantially improved economic performance or economic outlook,” Mulraine said.
The delay in winding down the program will swell its total size to encompass $763 billion in mortgages and $705 billion in Treasuries for a total of $1.47 trillion, according to the median of economist estimates. In a Sept. 6 survey, before Bernanke’s press conference, economists projected the program would conclude with $1.29 trillion in purchases.
One reason the expansion hasn’t gained momentum is that business investment has cooled. Spending on new equipment climbed 2.3 percent over the past four quarters, the smallest year-over-year advance since the end of 2009 when the world’s largest economy was beginning to emerge from the recession.
Kurt Kuehn, chief financial officer for Atlanta-based United Parcel Service Inc. (UPS), said limited demand helps explain why companies are slow to boost capital spending.
“We are reinvesting where we need it, but with muted growth right now there is not a huge need for expansion,” Kuehn said on Bloomberg Television’s “Bloomberg Surveillance” with Tom Keene and Sara Eisen.
Bullard, a voter on policy this year who has backed record stimulus, said on the same program that the decision at the Fed’s Sept. 17-18 meeting not to slow bond purchases was a close call.
“That was a borderline decision” after “weaker data came in. The committee came down on the side of, ‘Let’s wait.’”
Markets shouldn’t have been surprised by the decision because FOMC members have repeatedly said the decision to taper would be “data dependent,” Bullard said.
“I’m a little dismayed at those in markets that are saying they’re surprised by this,” Bullard said. The Fed said that, “if the economy was going to improve in the second half of the year, and if we saw that improvement, we would taper.”
Economists have also pushed back their estimates for when the Fed’s bond-buying program will conclude, with the median estimate calling for it ending at the Fed’s September 2014 meeting. In the Sept. 6 survey, they saw the program ending in June 2014. Bernanke himself had said in remarks at his June press conference the program would likely end around mid-2014.
“It’s almost like Bernanke got up this week and said don’t believe everything you’ve heard,” said Chris Low, chief economist at FTN Financial Inc. in New York. “Can’t imagine there’s anything that’s going to come in one month that changes their minds.”
Even as he postponed reducing bond purchases, Bernanke emphasized that the Fed would continue to provide stimulus through its near-zero interest-rate policy.
“The first increases in short-term rates might not occur until the unemployment rate is considerably below 6.5 percent,” he told reporters.
The Fed has provided guidance on its interest-rate policy by saying it would keep its target rate near zero at least as long as unemployment is above 6.5 percent, so long as inflation does not breach 2.5 percent.
“The view of the academic research suggests that forward guidance is probably the most effective in supporting the economy,” said Scott Brown, chief economist for Raymond James & Associates Inc. in St. Petersburg, Florida. “The asset purchases are positive but less effective” so “by December, tapering seems a bit more likely.”
-- With assistance from Aki Ito in San Francisco and Michael McKee, Sara Eisen and Tom Keene in New York. Editors: Vince Golle, Carlos Torres
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