NEW YORK Jan 9 Few dealers expected the Federal Reserve to decide to pare back its massive bond-buying stimulus program in December, after the U.S. central bank surprised many investors by continuing the purchases at an unchanged pace in September, according to the results of a poll by the New York Fed released on Thursday.
The poll, taken before the Fed's Dec. 17-18 meeting, when it reduced its monthly Treasuries and mortgage-backed program by $10 billion to $75 billion beginning in January, showed that only 25 percent of primary dealers expected the Fed would cut its purchases of Treasuries in December, and only 18 percent expected a reduction in mortgage-backed securities.
That was fewer than the 58 percent of respondents who expected the Fed to pare its Treasuries purchases in September, and the 52 percent who expected MBS-buying to also be reduced.
The Fed's decision to leave the purchase program unchanged in September surprised many investors and traders. Some complained the decision left them less able to read the central bank's intentions and trust in its communication strategy.
Many traders took losses after yields on benchmark 10-year Treasuries almost doubled to near 3 percent in the four-and-a-half months heading into September's meeting, after comments by Fed Chairman Ben Bernanke in May were interpreted as making a pullback in purchases more likely.
The yields subsequently fell back below 2.50 percent when the Fed kept bond purchases unchanged, before climbing back to around 2.85 percent on Dec. 18 when the Fed announced it would begin tapering its purchases.
The Fed's fear of making an error by trimming purchases drove its decision in September, when markets were also preoccupied with the prospect of another U.S. government shutdown and the risk of a debt default, said Millan Mulraine, an analyst at TD Securities in New York.
In December the context was "the polar opposite," with greater economic growth momentum and fiscal clarity enabling the Fed to reduce purchases, Mulraine said.
As the Fed moves to gradually withdraw stimulus and return markets to more normal conditions, its communications strategy will be of vital importance. If bonds sell off at a faster pace than the Fed intends, the higher yields could imperil the economic recovery that it has aimed to foster.
The New York Fed's poll shows that there remains a fair degree of confusion over timing, at least among the dealers surveyed. March was seen as the most likely month that the Fed would begin cutting back.
"That's not a goal, to surprise people," Boston Fed President Eric Rosengren told Reuters this week, but he added that there were times when tough decisions had to be made.
And while many bond investors had expected tapering in September, a large group were also unsure, New York Fed markets head Simon Potter told a group of bond traders and other financial market participants in December.
Potter told attendees at a Money Marketeers event that a significantly lower proportion expected a pullback in September than the 90 percent of dealers that expected the Fed would introduce its second quantitative easing stimulus program, totaling $600 billion of purchases, in November 2010.
Anecdotal conversation with overseas traders suggested that they may have had even lower expectations than those in the United States, he added.
If banks had priced for a different outcome, Potter said it may have been because questions they placed in their investor surveys were vague.
"If people have surveys, please ask probability-type questions, not just the most likely event," he said, noting that if there were four choices on a survey it could skew the response. "It's confusing when people are asked that question." (Additional reporting by Jonathan Spicer; Editing by Paul Simao)