December 20, 2013 / 8:12 PM / 6 years ago

Fed's taper puts policy on a clear course: economists

LONDON (Reuters) - There is now a clear consensus that the U.S. Federal Reserve will wind down its bond-buying stimulus by the end of next year and will likely hike interest rates late in 2015, a Reuters poll of 62 economists showed on Friday.

The sun rises to the east of the U.S. Federal Reserve building in Washington, July 31, 2013. REUTERS/Jonathan Ernst

While most analysts had expected the Fed to wait a few months into next year before announcing it would trim its monthly $85 billion of bond purchases, the fact it did so on Wednesday by $10 billion was welcomed by respondents.

At his last scheduled news conference as Fed chairman, Ben Bernanke said the purchases would likely be cut at a “measured” pace through much of next year if job gains continued as expected, with the program fully shuttered by late-2014.

Fifty-five out of 60 economists took that to mean the Fed would trim $10 billion off the monthly stimulus in each of the Federal Open Market Committee meetings next year, reaching zero by 2015.

That represents something of a coup for the Fed’s communication.

Many of the same economists branded its strategy “unclear” in September when the Fed shocked markets by pressing on with quantitative easing, a policy that has left it holding roughly $4 trillion of bonds since 2008.

“Tapering had to start at some point. The Fed will still be adding stimulus as it slows the pace of purchases,” said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida.

“There’s plenty of leeway to taper faster or slower as conditions warrant.”

The Fed tempered its move to roll back bond buying by suggesting its key interest rate would stay at rock bottom even longer than previously promised.

Half of respondents, 30, said the next rate hike would come in the second half of 2015. Most of the other half said it would come in the first half, while a handful said 2016.

“Late-2015 will be the starting point for the first rate hike. However, the risk is for it to be pushed further into the future if inflation continues to disappoint,” said Millan Mulraine, senior U.S. macro strategist at TD Securities in New York.

The latest survey echoed the findings of Wednesday’s Reuters poll of primary dealers, the large financial firms that trade securities directly with the Fed.


Like financial markets, economists took a sanguine view of the taper, with 46 of 58 judging the Fed got its timing right.

“Pre-announcing the decision to taper for January was a mindfully cautious move,” said Lena Komileva, director of G+ Economics in London.

“The Fed chose to stress-drive its strategy before actually reducing its market liquidity injections after the holiday season, opting for clear communication now and the taper in 2014, which was in line with the broad sentiment of the market.”

The remaining dozen were split between those arguing the Fed should have eased off the accelerator before now, and those who thought it would have done no harm to wait an extra month or two.

While the poll showed a firm consensus on the path of monetary policy, several economists pointed out that the strength of the economic data from here - whatever the Fed’s intentions - would be the overriding factor.

“The Fed is now focusing on its forward guidance tool, but it can be a double-edged sword,” said Thomas Costerg, U.S. economist at Standard Chartered in New York.

“The main risk to the Fed’s view is that inflation may be higher than it expects medium-term, especially if the unemployment rate moves quickly to its potential rate and the output gap narrows further.”

Polling by Ashrith Doddi; Editing by Chris Reese

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