Fed's QE3 program seen totaling $600 billion

NEW YORK Fri Sep 14, 2012 5:41pm EDT

NEW YORK (Reuters) - The Federal Reserve will buy a total of $600 billion of bonds under its new stimulus program announced Thursday, known as QE3, and will look for a U.S. unemployment rate of 7 percent before it halts the program, according to the median of forecasts from a Reuters poll on Friday.

Forecasts from 52 economists for the ultimate size of the program ranged from $250 billion to $2 trillion, the poll found.

The Fed said on Thursday it was launching a new program of buying $40 billion a month of mortgage-backed securities bonds that would be open ended as it sought to "improve substantially" the outlook for the labor market.

The move, leaving the program open-ended until the jobs market improves, was a "revolutionary shift in the Fed's policy reaction function," said Michael Gregory, senior economist at BMO Capital Markets in Toronto. He added that there is "much more (quantitative) easing to come."

Within the poll, the median of forecasts from 13 primary dealers -- the large Wall Street institutions that do business directly with the Fed -- was for a total QE3 size of $750 billion.

In two prior rounds of quantitative easing, the Fed bought $2.3 trillion in mortgage and government debt in a bid to push down borrowing costs.

The median of forecasts from 47 economists who answered a question on an unemployment target was for the jobless rate to dip to 7 percent before the Fed considers shutting down QE3.

Some economists were reluctant to peg an exact unemployment level, saying Fed Chairman Ben Bernanke and the Fed would consider several aspects of the labor market, including the rate of jobs growth, when considering ending QE3.

"Bernanke made it clear in his press conference that the unemployment rate is not the only job market indicator that will influence their reaction function," said Jacob Oubina, senior U.S. economist at RBC Capital Markets in New York.

"In other words, we will likely have to see material improvement in labor force participation, employment-to-population, and net job gains in order for the Fed to pare back purchases," he said.

The unemployment rate stood at 8.1 percent in August and has remained above 8 percent since February 2009.

Of 58 economists polled on Friday, 49 said the Fed would buy more Treasuries once its "Operation Twist" stimulus program finishes in December.

Under Twist, the Fed is selling shorter-dated Treasuries and using the proceeds to buy longer-dated U.S. government debt in an effort to reduce longer-term borrowing costs like those on mortgages.

"Until the labor market outlook improves 'substantially', both MBS and Treasury purchases are likely once Operation Twist is completed. We expect to see the Fed buy a combination of the two next year," said Dana Saporta, economist at Credit Suisse in New York.

Fifty-two of 58 economists said they have not revised their expectations for the unemployment level at the end of 2013 and 2014 in the wake of the QE3 announcement, while six did revise their outlooks for the unemployment rate.

"We continue to believe that monetary policy is ineffective in influencing the fundamental economic backdrop," RBC's Oubina said.

One of the six that did change their unemployment projections following the QE3 announcement, BMO Capital Markets, reduced its outlook for the jobless rate to 7.8 percent in the fourth quarter of 2013 from its original estimate of 8.2 percent.

(Additional reporting by Ashrith Rao and Rahul Karunakar in Bangalore and Caryn Trokie in New York; Editing by Dan Grebler)

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Comments (3)
judgebean wrote:
There is no theoretical foundation or substantiation that would indicate this move will lower the unemployment rate. In fact it will drive food and gas prices higher creating even more unemployed people.

As long as the Dow is at 14K – that’s all that matters. (rolls eyes)….

Sep 14, 2012 7:23pm EDT  --  Report as abuse
SoundMoney wrote:
This is intended to prop up Fannie Fae/Freddie Mac and the agency MBS markets. It will benefit Fed member banks. The Twist will benefit the government, keeping long-term borrowing costs low.

It will not help improve unemployment, nor will it restore real growth in the economy, nor will it prevent asset price inflation, its prime “side effect,” which is touted as benefitting the middle class who are invested in the market – except many in the middle class are pulling funds from the markets due to increasing risks and a poor track record for retaining investor principal. Investment in public markets will not increase substantially, so only those who “believe” in the asset bubble and its sustenance from these Fed measures will benefit, albeit as long as the markets go up and do not violently correct.

We need to get back to sound money, cartel-free banking, and sound capital markets. Until then, the vast majority of money out there waiting to be invested will remain inactive, based on risk adversity (and for good reason). The Fed cannot create wealth, it cannot create real growth, and it cannot force people where or how to invest.

Sep 15, 2012 11:56am EDT  --  Report as abuse
SoundMoney wrote:
This is intended to prop up Fannie Fae/Freddie Mac and the agency MBS markets. It will benefit Fed member banks. The Twist will benefit the government, keeping long-term borrowing costs low.

It will not help improve unemployment, nor will it restore real growth in the economy, nor will it prevent asset price inflation, its prime “side effect,” which is touted as benefitting the middle class who are invested in the market – except many in the middle class are pulling funds from the markets due to increasing risks and a poor track record for retaining investor principal. Investment in public markets will not increase substantially, so only those who “believe” in the asset bubble and its sustenance from these Fed measures will benefit, albeit as long as the markets go up and do not violently correct.

We need to get back to sound money, cartel-free banking, and sound capital markets. Until then, the vast majority of money out there waiting to be invested will remain inactive, based on risk adversity (and for good reason). The Fed cannot create wealth, it cannot create real growth, and it cannot force people where or how to invest.

Sep 15, 2012 11:56am EDT  --  Report as abuse
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