Primary Dealers Saw Fed’s Confusing Strategy Reducing QE Impact

The 21 primary dealers that trade securities directly with the Federal Reserve Bank of New York, said that confusion about the central bank’s intentions for its bond-buying program is reducing the policy’s effectiveness.

The dealers’ views were shared with the New York Fed in a survey of primary dealers that the Federal Open Market Committee reviewed at their April 30-May 1 meeting. A diversity of Fed speakers expressing different views has left the primary dealers unsure of the central bank’s intentions, according to the survey results released today by the New York Fed.

“Some dealers noted that the dispersion of views expressed by FOMC participants as to how the FOMC would make decisions regarding the future pace of asset purchases has decreased clarity around the program,” the survey said. “Of these dealers, several suggested that the differing views on monetary policy may reduce the policy’s effectiveness.”

Fed officials have yet to reach consensus on when or how to dial back their $85 billion monthly bond-purchase program designed to spur growth and lower unemployment. Officials have publicly aired varying views on when the purchases should be dialed back and ended.

Philadelphia Fed President Charles Plosser has called for reducing the pace of stimulus as soon as the Fed’s next meeting in June, while St. Louis Fed President James Bullard said earlier this week the purchases should continue. The New York Fed’s William C. Dudley said he needs three to four months to assess if the economy is weathering federal budget cuts.

Rate Effectiveness

Asked to rate the effectiveness of the Fed’s communication on a scale of 1 to 5, with 5 being very effective, four primary dealers gave the Fed a mark of 2 and 10 gave the Fed a mark of 3. Only one institution said communications had been very effective.

The primary dealers include divisions of some of the world’s most sophisticated financial institutions such as Goldman, Sachs & Co., Deutsche Bank Securities Inc. and UBS Securities LLC. The survey does not identify which respondent provided which answer. As recently as December, 16 of the 21 institutions gave the Fed a score of 4 or 5 on the clarity of their communications.

The median respondent to the survey said the central bank’s $85 billion monthly purchase program will end in the second quarter of 2014. The program is aimed at lowering the 7.5 percent unemployment rate until the labor market has “improved substantially.”

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