Fed set to unveil tapering of asset purchases next week

BANGALORE Tue Sep 10, 2013 4:09am EDT

The facade of the U.S. Federal Reserve building is reflected on wet marble during the early morning hours in Washington, July 31, 2013. REUTERS/Jonathan Ernst

The facade of the U.S. Federal Reserve building is reflected on wet marble during the early morning hours in Washington, July 31, 2013.

Credit: Reuters/Jonathan Ernst

BANGALORE (Reuters) - The U.S. Federal Reserve will announce next week it will trim its monthly spending on asset purchases by $10 billion - a smaller amount than previously expected - according to a Reuters poll of economists.

Nearly three-quarters of the 69 economists polled after Friday's mixed jobs data expect the Fed to announce a taper to its quantitative easing (QE) program after its September 17-18 meeting.

That compared with just 25 of 41 economists in a poll conducted last month.

Friday's disappointing non-farm payrolls data raised doubts over the momentum of jobs growth, but the jobless rate, which the Fed targets, fell to 7.3 percent.

However, that unemployment rate, which fell to its lowest since December 2008, was a reflection of a drop in the share of working-age Americans who either have a job or are looking for one.

"We doubt that the jobs data will prevent tapering beginning at the FOMC meeting but it does support our view of a smaller $10 billion taper," said Mitul Kotecha, global head of foreign exchange strategy at Credit Agricole-CIB.

The unemployment rate was 7.8 percent when the Fed announced QE3 last September.

The poll's findings are in sync with the Reuters survey of 18 primary dealers, the banks and brokers doing business directly with the Fed, conducted immediately after Friday's jobs data. <FED/R>

Forecasts from the primary dealers are also included in the latest poll.

The increased conviction for tapering to be announced next week comes even as data releases show consumer spending, home building, new home sales, durable goods orders and industrial production all weakened in July.

Friday's jobs report added to those concerns, meaning the Fed is likely to cut its monthly stimulus by less than previously forecast. The Fed is currently buying $85 billion per month of Treasuries and mortgage-backed securities.

Economists now expect the Fed to initially scale down its monthly asset buys by $10 billion, down from the $15 billion median in Friday's primary dealer poll and a wider poll conducted in August.

Economists in the wider poll expect most of the initial reduction to be directed at Treasuries rather than MBS.

"The markets have been so focused on September, I think they have to do at least a nominal taper. They might do something small that would be more symbolic than substantive," said Richard Moody, chief economist at Regions Financial.

The QE3 program, on which the Fed could end up spending a total of $1.3 trillion, will be wound up by the end of next year, the poll showed.

But monetary policy will stay easy, with most forecasters not expecting a hike in the Fed's key interest rates until 2015.

The Fed has said it will leave key interest rates near zero at least until the unemployment rate falls to 6.5 percent. Economists in the latest poll were divided on when that is likely to happen, with 30 expecting it to happen next year and 34 expecting it in 2015 instead. One economist said it would happen in 2016.

(Reporting and polling by Deepti Govind; Editing by Chris Reese)

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