Fed Seen by Economists Trimming QE in September, 2014 End

The Federal Reserve will trim its monthly bond purchases to $65 billion in September and end buying in June 2014, according to the plurality of estimates by economists in a Bloomberg survey.

The survey of 54 economists was conducted June 19-20, following Chairman Ben S. Bernanke’s press conference, in which he mapped out a timetable for ending one of the most aggressive easing strategies in Fed history. His remarks prompted economists to predict a faster reduction in bond purchases from $85 billion per month: 44 percent of economists see a tapering in September compared with 27 percent in a June 4-5 survey.

“It’s a shot heard round the world for global investors -- a reminder that QE is in fact going to end one day,” said Chris Rupkey, the chief financial economist for Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, referring to a policy known as quantitative easing. “One thing that would help them wind down quicker would be confirmation the unemployment rate is going to come down quicker.” The jobless rate in May was 7.6 percent.

Bernanke, speaking on June 19 after a two-day meeting by the Federal Open Market Committee, said the Fed may begin dialing down its unprecedented bond buying this year and end it in mid-2014 if the economy achieves the Fed’s objectives. His remarks sparked a sell-off in global financial markets, with stocks falling and bond yields rising for two days.

‘Inappropriately Timed’

Federal Reserve Bank of St. Louis President James Bullard, who dissented at the Fed meeting, said that officials “inappropriately timed” their decision to lay out a plan to reduce the pace of quantitative easing.

“A more prudent approach would be to wait for tangible signs that the economy was strengthening and that inflation was on a path to return toward target before making such an announcement,” Bullard said in a news release today.

Stocks and commodities rebounded today, paring their weekly declines. Standard & Poor’s 500 Index futures rose 0.8 percent to 1,596.5 at 12:07 p.m. in London. Gold for immediate delivery climbed 0.7 percent after yesterday sliding below $1,300 an ounce to the lowest since September 2010. The metal has dropped 7 percent this week, the most since September 2011, while the S&P 500 is down 2.4 percent since June 14.

U.S. Treasuries

U.S. Treasuries rose today, with 10-year yields falling two basis points to 2.4 percent. Two-year note yields were little changed at 0.32 percent. The dollar is poised for a weekly advance against all of its major counterparts.

Fifteen percent of economists in the survey said the Fed will start to taper in October and 28 percent said policy makers will wait until December. The remaining 13 percent said the Fed won’t begin reducing its pace of purchases until at least next year.

Policy makers are planning to taper as the economy strengthens. Fed officials forecast growth of as much as 2.6 percent this year and 3.5 percent in 2014.

The central bank’s forecasts for growth are more optimistic than Wall Street’s. The median estimate of private forecasters in a Bloomberg survey calls for an expansion of 1.9 percent this year and 2.7 percent next year.

The amount of initial tapering predicted by economists in the most recent survey was unchanged from the prior one. The central bank will halt bond buying entirely in June 2014, according to 44 percent of the economists in the latest survey.

Fed Forecasts

If economic data are consistent with the Fed’s forecasts, “the committee currently anticipates that it would be appropriate to moderate the pace of purchases later this year,” Bernanke said at the press conference. “We will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year.”

The impact of tapering is largely reflected in prices of financial assets, said Jonathan Wright, an economics professor at Johns Hopkins University in Baltimore who worked at the Fed’s division of monetary affairs from 2004 until 2008.

“Saying that the Fed will taper later this year tightens financial conditions right now -- a risky strategy when the economy is only just gaining a bit of momentum,” he said.

The U.S. central bank began its third round of large-scale asset purchases in September by buying $40 billion a month of mortgage-backed securities. The Fed added $45 billion of Treasury purchases in December. The FOMC has said since September that it will buy bonds until seeing signs of substantial labor-market improvement.

Bernanke’s Successor

Reducing stimulus and winding down the balance sheet without roiling markets is one of the biggest challenges Bernanke’s successor would face, should the chairman not serve a third, four-year term. President Barack Obama said this week that Bernanke, 59, has stayed in his post “longer than he wanted,” one of his clearest signals yet the Fed chief will leave.

Fed Vice Chairman Janet Yellen is the likeliest candidate to replace Bernanke when his term ends in January 2014, according to economists in the survey. The economists assigned Yellen a 65 percent chance of ascending to the top job at the central bank.

Former Treasury Secretary Timothy F. Geithner was given a 10 percent chance of becoming the next chairman and former Obama adviser Lawrence Summers, Treasury secretary under President Bill Clinton, was given 9 percent odds.

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