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Most U.S. primary dealers see Fed trimming purchases in March 2014: poll
October 22, 2013 / 7:08 PM / 4 years ago

Most U.S. primary dealers see Fed trimming purchases in March 2014: poll

A general view of the U.S. Federal Reserve building as the morning sky breaks over Washington, July 31, 2013. REUTERS/Jonathan Ernst

NEW YORK (Reuters) - A majority of U.S. primary dealers polled by Reuters on Tuesday said the Federal Reserve would not start cutting its monthly bond purchases until March of next year and said the recent government shutdown and standoff over raising the U.S. debt ceiling had significantly impacted on the Fed’s timing.

News that U.S. employers added far fewer workers than expected in September, suggesting a loss of momentum in the economy, only reinforced the view that cuts in the amount of Treasuries and mortgage-backed securities the Fed has been buying to stimulate the economy are being nudged farther out on the horizon, in contrast to the once-widespread notion that cutbacks would be announced in September 2013.

In the Reuters poll, nine of 15 dealers said they expected the Fed to begin tapering its purchases in March. Two dealers said they expected a tapering announcement to occur at the Fed’s January 28-29 policy meeting. Two widened that timeframe to the first quarter of 2014. One said cutbacks would be announced no sooner than January. One said the Fed would not announce cutbacks in its purchasing program until June 2014.

The 15 primary dealers polled offered a median estimate that the Fed would cut its purchases by $15 billion a month, a size unchanged from a Reuters poll of 18 dealers done in September.

Eight of the 15 dealers said the recent U.S. budget impasse and debt ceiling standoff had had a significant impact on the timing of the Fed’s eventual tapering of its purchases.

“The impact was significant,” said Thomas Simons, money market economist at Jefferies & Co in New York. “Were it not for the impasse, the Fed might already have tapered.”

Uncertainty about what will happen when the debt ceiling must be raised again on February 7 makes it unlikely the Fed would announce a tapering sooner than its January 28-29 meeting, he said.

An encore of October’s government shutdown and debt ceiling crisis early next year is somewhat improbable so that variable may exercise less influence on Fed policy than it did this year, said Michael Moran, chief economist at Daiwa Securities America.

“I think they’ll find a way to sidestep it,” he said. “I cannot imagine Republicans being foolish enough to have a repeat of what we had in the last month or so. I think they will come up with some kind of agreement. Certainly they won’t shut the government down. But the absence of a budget or passage of another continuing resolution would lead the Fed to be uncertain and keep quantitative easing going.”

Political crises aside, the Fed’s tapering decision will also be “data-dependent,” Jefferies’ Simons said, referring to what data show about the health of the economy.

In an early September Reuters poll, 13 of 18 primary dealers predicted the Fed would announce a reduction in its $85 billion per month of Treasury and mortgage-backed securities (MBS) purchases at a September 17-18, 2013 policy meeting. That poll, too, was conducted on a day when the government reported somewhat disappointing U.S. jobs growth for the previous month.

The tepid temperature of the labor market in September affected Deutsche Bank Securities’ tapering forecast.

“Prior to the report released today we felt it was a 50-50 split between December and March, but given the weak tone of the September employment data, we think the probability has shifted to the March policy meeting for the Fed to announce a tapering,” said Carl Riccadonna, senior economist at Deutsche Bank Securities in New York.

The median of forecasts from the 15 dealers polled on Tuesday was for the central bank to initially shave $15 billion per month from its purchases, the same amount predicted in the September 6 poll. Estimates ranged from $10 billion to $20 billion on October 22, compared to $10 billion to $25 billion on September 6.

Economists were mixed on how the Fed would distribute the cuts, with a narrow majority expecting cuts in Treasury purchases to be larger than cuts in the Fed’s purchases of mortgage-backed securities (MBS).

Thirteen of the dealers polled said they believed the Fed would end the $85 billion in monthly purchases it has been making to stimulate the economy in the second half of 2014.

Of the 15 dealers who responded to the survey, 13 said they expected the Fed to raise its key federal funds interest rate in 2015 and two said the Fed would raise it in 2016.

Primary dealers serve as trading counterparties of the Federal Reserve Bank of New York in its implementation of monetary policy. They are obliged to participate consistently in open market operations to carry out U.S. monetary policy formulated by the Federal Open Market Committee (FOMC) and provide the New York Fed’s trading desk with market information and analysis helpful in the formulation and implementation of monetary policy.

Primary dealers are also required to participate in all auctions of U.S. government debt.

There are 21 U.S. primary dealers, but not all of them responded to the survey.

Reporting By Ellen Freilich; Editing by Nick Zieminski

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