NEW YORK The Federal Reserve is likely to begin shrinking the size of its debt purchase program, intended to prop up economic growth and support the labor market, by September of this year, according to the majority of economists at large Wall Street firms.
Economists at Goldman Sachs and J.P. Morgan specifically cited the government's announcement earlier on Friday of stronger-than-expected U.S. jobs growth for June as a factor in bringing forward their expected timing of the Fed slowing.
Goldman and J.P. Morgan are two of 21 U.S. primary dealers - the large financial firms that do business directly with the Fed - that were polled by Reuters on Friday.
Of 17 dealers who answered a question on the expected timing of a reduction in purchases, 11 called for September, while three said October, two said December and one said it would happen in the first quarter of 2014.
In a similar poll conducted June 19, seven of 17 dealers called for a slowing in September. One dealer in the previous poll had called for the slowing this month, while three said October, one said November while four said December, with one still forecasting the first quarter of 2014.
Friday's poll was conducted after the government said U.S. employers added 195,000 new jobs to their payrolls last month, and revised its count for April and May to show 70,000 more jobs created than previously reported. Economists had been looking for 165,000 new jobs in June.
"With solid job gains through the first half of the year, the recovery appears to be overcoming the worst of the fiscal headwinds now at peak force. Fed officials are likely to keep tentative plans to start scaling back (quantitative easing), probably in September, barring a major upset," said Peter D'Antonio, economist at Citigroup in New York.
The Fed is currently buying $85 billion per month of Treasuries and mortgage-backed securities, and the median of forecasts from 13 dealers in Friday's poll was for buying to initially be scaled back by $20 billion per month. Forecasts ranged from a reduction of $10 billion per month to $28 billion per month.
The median forecast for an initial reduction of $20 billion per month was unchanged from the June 19 poll.
Of 16 primary dealers who answered a question on the timing of the end of the latest bond purchase program, 14 said it would happen on or before the middle of 2014, while two said September 2014. Those results were little changed from the June 19 poll.
Many analysts had been reeling in their forecasts for the timing of the beginning of the end of Fed purchases, after Fed Chairman Ben Bernanke said at a press conference on June 19 the economy is expanding strongly enough for the central bank to start slowing the pace of its bond-buying stimulus later this year.
Friday's payrolls data added to sentiment that the Fed could slow purchases sooner than originally expected.
"Coming into today, our call for a December first taper was already probably a little underwater, and after today's report we are moving to a call for a first reduction in asset purchases at the September (Federal Open Market Committee) meeting," J.P. Morgan economist Michael Feroli said in a note to clients.
The median of forecasts from 13 dealers called for the latest round of quantitative easing, known as QE3, to total $1.3 trillion of purchases of Treasuries and mortgage-backed securities. That was up marginally from a median of $1.255 trillion from 12 dealers polled June 19.
Economists at 13 of 14 dealers forecast the Fed will increase interest rates from the current ultra-low level near zero in 2015, while one said it would happen in 2016.