WASHINGTON (Reuters) - The Federal Reserve is expected to resume a program of large-scale asset purchases to try to revive a faltering economic recovery.
— The Fed will issue a statement on Wednesday around 2:15 p.m. (1815 GMT) following a two-day meeting of its Federal Market Open Market Committee, which sets policy.
— Analysts widely expect the Fed to resume purchases of longer-term Treasuries. They generally project purchases of around $500 billion over about 6 months.
— The Fed cut its main policy rate to near zero in December 2008 and later eased again by buying $1.7 trillion in assets.
— Fed Chairman Ben Bernanke has said long-term asset purchases are an effective way to lower borrowing costs when rates are near zero, but a program of this size and scope is untested and many worry further expansion of the Fed’s balance sheet sets the stage for inflation or another asset bubble.
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“While the Fed itself does not know just how much quantitative ease will be required or how long the program will be in effect, we expect enough guidance for markets to form firm views on the stance of monetary policy for a sustained period.”
“The advocates of QE2 expect a positive impact from lower interest rates lifting all interest sensitive areas of expenditures such as home purchases, refinancing of mortgages, and increased business expenditures, at the margin. In addition, bankers should be induced to lend given the alternatives of paltry earnings from excess reserves and Treasury securities. Also, the benefit of increased exports from a depreciation of the dollar should be seen in headline GDP. The current projected pace of economic growth is inadequate to lift payrolls and lower the unemployment rate. Therefore, from the FOMC’s standpoint, QE2 is the least costly policy option to shake off the sluggish economic conditions in place.”
HIDEO KUMANO, CHIEF ECONOMIST, DAI-ICHI LIFE RESEARCH INSTITUTE, TOKYO:
“The Fed may keep its initial bond buying amount small but will probably ensure markets that it will keep buying debt consistently. Its asset purchases will likely come in several stages, which I think is the most effective way of influencing bond yields.
“Even if the Fed’s purchase amount is modest, I’m not sure whether the dollar/yen will reverse its downtrend. There’s a good chance the dollar will fall below 80 yen after the Fed’s move That’s when Japan will seriously ponder whether to intervene in the currency market.”
PARK HEE-CHAN, MIRAE ASSET SECURITIES, SEOUL:
“We think the concept of QE2 will be different from the first round of QE which set the period and amount of bond purchases. This time they will unlikely make clear the size of bond purchases, which will be mostly treasuries though, and will just give basic guidelines. Its economic impact will be made for an extended period. Then markets will feel it difficult to make an immediate judgment from the announcement.”
“Widespread speculation in the market about the efficacy, the side-effects and the likely size of more Fed asset purchases, among investors as well as policy officials, means that QE is more art than science.... The Fed may opt for a gradualist, open-ended approach that minimizes short-term volatility in Treasuries and the dollar, and focuses instead on sustaining a reflationary momentum in the economy over time. That said, market expectations for this meeting are not homogeneous and there is some scope for disappointment, particularly in high-yield (low growth/high-leverage) assets, if the Fed chooses to embark on a more cautious plan after the ‘shock and awe’ $1.75 trillion program pursued during the peak of the crisis.”
“We expect that statement will announce an intention to purchase $500 billion of longer-dated Treasury securities over the next 6 months. In addition, we expect the statement will express a willingness — but not necessarily a bias — to further increase asset purchases if warranted by economic conditions. Enhancing the extended period language by tying it more closely to observable economic variables may be an option, but we don’t think it’s an option they will exercise at this meeting.”
MICHAEL HANSON, BANC OF AMERICA SECURITIES-MERRILL LYNCH, NEW YORK:
“On the QE2 front, we would expect language that takes its cue from QE1: To help support the recovery and to improve financial conditions, the committee decided to purchase around $500 billion of longer-term Treasury securities over the next six months. That up front commitment is necessary, in our view, to extend the rally in financial conditions. That language is likely to be coupled with the concluding paragraph from the September statement, in which the forward guidance has a dovish bias: the FOMC will continue to monitor economic and financial conditions, and is prepared to provide additional accommodation if needed.”
“There is still widespread recognition that the dynamics of the program are difficult, if not almost impossible, to judge.
Ongoing rhetoric from key policymakers suggests that the Treasury purchase program at the upcoming meeting would be structured to allow for increased flexibility — either to scale up or down the amount of purchases as needed — to consider the ambiguous benefits and costs of additional action, minimize the risks of unnecessary knee-jerk reactions in financial markets and potential challenges to policy communication.”
“Beyond its direct impact on the domestic economy ... QE2 may indirectly promote faster US growth through a less-recognized, international channel: The Fed’s actions are strengthening currencies abroad and forcing policymakers to choose whether to accept currency strength, adopt easier policies, or implement capital controls. ... At the same time, such pressures do risk fanning currency tensions or even triggering protectionist measures, which would be extremely negative for global markets and the global economy.”
“A few hundred billion dollars is clearly less than the total amount of purchases now anticipated by financial market participants, and likely by most Fed officials. (We also expect the eventual total to be larger than the initial commitment.) However, opposition from some Fed officials appears to have encouraged the chairman to start with a relatively small, but open-ended program. We expect the FOMC statement will clearly signal a ‘bias’ toward more purchases in later months, conditional upon economic and market developments.”
NIGEL GAULT, IHS GLOBAL INSIGHT, LEXINGTON, MASSACHUSETTS:
“Our best guess is that the FOMC will launch a program of at least $500 billion, and possibly with some flex of up to $800 billion. The Fed will launch a set of incremental purchases and adjust its end target based on the performance of the economy. ... A significant chunk of the new Treasury funding for fiscal 2011 (which will average just over $100 billion per month) will be taken off the table from November 2010 through about March 2011. From a portfolio balance perspective, this should do the trick of keeping long-term rates down and flattening out the yield curve.”
PETER SCHIFF, EURO PACIFIC CAPITAL, WESTPORT, CONNECTICUT:
“At the end of the day, all this deflation talk is a red herring. The true purpose of QE 2 is to disguise the decreasing ability of the Treasury to finance its debts. As global demand for dollar-denominated debt falls, the Fed is looking for an excuse to pick up the slack. By announcing QE 2, it can monetize government debt without the markets perceiving a funding problem.”
Reporting by Reuters bureaus; Editing by Chizu Nomiyama, Neil Fullick and Andrew Hay