More Fed monetary easing likely on Thursday: Reuters poll

NEW YORK Wed Sep 12, 2012 10:59am EDT

A view shows the Federal Reserve building on the day it is scheduled to release minutes of the Federal Open Market Committee from August 1, 2012, in Washington August 22, 2012. REUTERS/Larry Downing

A view shows the Federal Reserve building on the day it is scheduled to release minutes of the Federal Open Market Committee from August 1, 2012, in Washington August 22, 2012.

Credit: Reuters/Larry Downing

NEW YORK (Reuters) - Odds are mounting that the Federal Reserve could take action as soon as Thursday to energize a U.S. economy that is struggling to gain momentum in the face of a lackluster labor market and uncertain fiscal policy, according to a Reuters poll.

Economists lowered their forecasts for third-quarter growth to 1.7 percent at the same time as they ratcheted up the odds of a third round of bond buying from the Fed to 65 percent from the 60 percent chance that was seen as recently as August's poll.

Such an announcement was likely to come as early as Thursday when the central bank's policy-setting committee concludes a two-day meeting, the poll found. Of the 51 economists who put the chances of quantitative easing, or QE3, at greater than 50 percent, 39 expected the Fed to act this week.

Another 10 said the Fed will move by the end of the year and two didn't say when. Designed to keep borrowing costs low and bolster the economy, the central bank has already made $2.3 trillion in asset purchases through its first two programs.

Economists said the Fed could act to offset the number of headwinds facing the recovery, including slower global growth prospects, the debt crisis in the euro zone and uncertainty surrounding a set of U.S. tax hikes and spending cuts set to take effect at the start of next year.

"We see the U.S. as remaining in a moderate yet unspectacular recovery, and it's punctuated by these slow patches because our private sector is very sensitive to changes in the global environment right now," said Michael Gapen, senior U.S. economist at Barclays Capital.

Expectations the Fed will step in with additional stimulus have intensified since last week's disappointing August U.S. jobs figures. Chairman Ben Bernanke said in a speech late last month that progress in bringing down unemployment was too slow.

The median forecast was for $500 billion in new purchases, though some said they expected the Fed to announce an open-ended program that would allow the central bank to tailor the amount needed according to changes in the economy.

"Monetary stimulus will 'shore up' a fundamentally weak economy, as opposed to helping the U.S. economy attain a significantly faster underlying rate of growth," said John Lonski, economist at Moody's Investors Service.

A Reuters poll last week put the chances of QE3 at 60 percent. Broken down to the 14 U.S. primary dealers - the large financial institutions that do business directly with the Fed - those odds were at 68 percent.

Economists trimmed their forecasts for third-quarter growth to 1.7 percent from the 1.8 percent that was seen in August's poll. That would be the slowest growth rate since December 2010.

The economy is expected to fare better at 2.0 percent in the final quarter of the year.

But respondents anticipate the economy will slow back down to 1.7 percent at the beginning of next year and will average only 2.0 percent growth for 2013.

"We're going to be more susceptible to any negative shocks that may come around because (the economy is) not growing very rapidly," said Scott Brown, chief economist at Raymond James.

Prospects for the labor market looked dimmer with economists expecting the third quarter will see an average monthly increase of 121,000 jobs, down from earlier forecasts of 135,000. Fourth-quarter expectations were also cut to 135,000 from 150,000.

Tame inflation expectations could give the Fed room to maneuver. Economists maintained their forecast for the consumer price index to rise 2.0 percent for both this year and next.

Predictions for core inflation, which strips out volatile items such as food and gasoline, also held steady at 2.2 percent for 2012 and 1.9 percent for next year.

(This story was refiled to clarify non-farm payrolls forecasts in paragraph 15 are a monthly average for the quarter)

(Polling by Ruby Cherian and Snehasish Das; Editing by Ross Finley and Susan Fenton)

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Comments (1)
Harry079 wrote:
“The central bank has already made $2.3 trillion in asset purchases through its first two programs.”

So just what are these assets that the Fed is purchasing?

From Wikipedia:

The US Federal Reserve held between $700 billion and $800 billion of Treasury notes on its balance sheet before the recession.

In late November 2008, the Fed started buying $600 billion in Mortgage-backed securities (MBS). By March 2009, it held $1.75 trillion of bank debt, MBS, and Treasury notes, and reached a peak of $2.1 trillion in June 2010. Further purchases were halted as the economy had started to improve, but resumed in August 2010 when the Fed decided the economy was not growing robustly. After the halt in June holdings started falling naturally as debt matured and were projected to fall to $1.7 trillion by 2012.

The Fed’s revised goal became to keep holdings at the $2.054 trillion level. To maintain that level, the Fed bought $30 billion in 2–10 year Treasury notes a month. In November 2010, the Fed announced a second round of quantitative easing, or “QE2″, buying $600 billion of Treasury securities by the end of the second quarter of 2011.

So the Treasury issues billions in bonds and the Fed buys them with money that doesn’t exist until the bonds make their balance sheet and they call those assets.

And now the ECB is playing this shell game.

Sep 12, 2012 12:44pm EDT  --  Report as abuse
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