Fed Seen Tapering Quantitative Easing Next MonthJoshua Zumbrun and Catarina Saraiva
Federal Reserve Chairman Ben S. Bernanke next month will probably reduce the central bank’s $85 billion in monthly bond purchases, according to 65 percent of economists surveyed by Bloomberg.
The Federal Open Market Committee’s first step may be small, with monthly purchases tapered by $10 billion to a $75 billion pace, according to the median estimate in a survey of 48 economists conducted Aug. 9-13. The Fed will end the buying by mid-2014, they said. In a survey last month, half of economists predicted a Fed reduction in bond buying at the next scheduled FOMC meeting Sept. 17-18.
“While the data hasn’t been great, it’s been good enough to support the notion of tapering,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, and a former Richmond Fed economist. “They want to wind this down in an orderly way and get it done in a reasonable period of time.”
Bernanke and his policy-making colleagues are contemplating how to finish a third round of so-called quantitative easing that has swelled the Fed’s balance sheet to a record $3.59 trillion. The unprecedented bond buying is aimed at combating unemployment and bolstering an economy that expanded by only 1.4 percent in the 12 months through June.
The unemployment rate has fallen to 7.4 percent from an 8.1 percent rate reported the week before the Fed started the current bond-buying program in September. The central bank will learn more about employment on Sept. 6, when the Labor Department issues a jobs report for the month of August. In July, the economy added 162,000 jobs and the unemployment rate dropped to 7.4 percent from 7.6 percent.
Atlanta Fed President Dennis Lockhart told reporters after a speech yesterday that monthly data on employment would be the most important factor he’ll weigh in considering whether to favor a slowing of purchases next month. “I wouldn’t rule out September at all,” said Lockhart, who participates in FOMC discussions but doesn’t vote on this year on monetary policy.
Economists in a July 18-22 Bloomberg survey expected the Fed to reduce the pace of purchases by $20 billion to $65 billion. The central bank each month is currently buying $45 billion in Treasuries and $40 billion in mortgage-backed securities.
The Fed’s first cut may be smaller if the pace of job growth doesn’t accelerate, said Millan Mulraine, director of U.S. research at TD Securities in New York.
“If anything, they may err on the side of tapering less rather than not doing it at all,” he said. “It will be a cautionary first step for extricating the Fed from QE.”
Fed Governor Jeremy Stein in June identified the September meeting as an opportunity for altering the pace of asset purchases, and said even disappointing economic reports would be a small factor in the decision.
The FOMC should “be clear that in making a decision in, say, September, it will give primary weight to the large stock of news that has accumulated since the inception of the program,” Stein said in a June 28 speech in New York. The Fed should “not be unduly influenced by whatever data releases arrive in the few weeks before the meeting -- as salient as these releases may appear to be to market participants.”
Bernanke won’t attend the Kansas City Fed’s annual economic policy symposium on Aug. 22-24 in Jackson Hole, Wyoming, a venue he could have used to explain the thinking behind any change in Fed policy. He is scheduled to hold a press conference after the FOMC meeting next month.
“As the economy continues to improve and pick up, this will warrant further cuts” to the pace of purchases, said Thomas Costerg, an economist with Standard Chartered Bank Plc in New York. “Although we think it helps if you have a press conference to start the process, we don’t think for further steps you need a media conference.”
By the December meeting, the pace of purchases will probably slow to $55 billion, split between $25 billion in mortgage bonds and $30 billion in Treasuries, according to the survey. By March, the pace will slow further to $15 billion of mortgage debt and $20 billion in Treasuries.
The tapering probably will coincide with a leadership transition at the Fed, according to economists. Bernanke’s term as chairman ends in January, and President Barack Obama has said he’s considering his former economic adviser Lawrence Summers, current Fed Vice Chairman Janet Yellen and former Vice Chairman Donald Kohn as potential successors for Bernanke.
A new Fed chairman would take over after tapering starts and before it ends.
According to the median estimate in the survey, the pace of purchases will fall to zero at the end of the FOMC’s June 17-18 meeting. Once finished, the central bank will have purchased a total of $1.29 trillion in bonds over the course of the program, divided between $665 billion of mortgage securities and $624 billion of Treasuries.
The total estimated size of purchases has declined from the July survey, in which economists estimated the program would total $1.32 trillion. That’s in line with a timeline Bernanke outlined to Congress, and in the press conference after the Fed’s June meeting.
“It would be appropriate to begin to moderate the monthly pace of purchases later this year” if economic data match Fed forecasts, Bernanke said in July 17 testimony to the House Financial Services Committee. “If the subsequent data continued to confirm this pattern of ongoing economic improvement and normalizing inflation, we expected to continue to reduce the pace of purchases in measured steps through the first half of next year, ending them around midyear.”