| NEW YORK
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