October 8, 2010 / 9:11 PM / 9 years ago

Primary dealers overwhelmingly see more Fed QE

NEW YORK (Reuters) - Leading Wall Street economists overwhelmingly expect the Federal Reserve to embark on another round of quantitative easing this year in an effort to prop up a struggling economy plagued by high unemployment, a Reuters poll found on Friday.

Kansas City Federal Reserve President Thomas Hoenig speaks regarding "Ending Government Bailouts" at the American Economic Association Conference in Atlanta, January 5, 2010. REUTERS/Tami Chappell

All 16 primary dealers who responded to the poll said the U.S. central bank will ease, with 14 of 15 respondents calling for an announcement at the end of the Federal Open Market Committee’s next policy meeting on November 3. The remaining one of the 15 respondents said the program would be announced in November or December.

Expectations for the Fed action rose from 10 of 16 primary dealers saying easing was likely in a similar poll done September 21 following the Fed’s last policy meeting.

More primary dealers — the 18 banks and investment firms that deal directly with the Fed to carry out monetary policy — also expect the Fed to keep interest rates on hold through all of next year, according to the poll.

The poll was conducted on Friday after the government said the U.S. economy shed 95,000 jobs in September, led down by the end of temporary jobs for the U.S. Census and by big losses at beleaguered local governments.

The unemployment rate was unchanged at 9.6 percent, but private employment, considered a better gauge of the labor market, rose 64,000 after a 93,000 gain in August.

“To me it was the private payrolls number that was important — you are still creating jobs but not enough to bring the unemployment rate down, which means quantitative easing sooner rather than later,” said Jonathan Basile, economist at Credit Suisse in New York.

The projected size of the quantitative easing ranged from $500 billion to $1.5 trillion, compared with estimates ranging from $300 billion to $1 trillion in the September poll.

Fifteen of 15 respondents said they expect the Fed to buy U.S. Treasury debt. Nine of those 15 said they expect the Fed to buy “Treasuries first,” or to include mortgage-backed securities and agency bonds in the buying.

The Fed announced in August it would buy Treasuries using funds from maturing MBS and agency bonds in an effort to keep steady its holdings of domestic securities. Since the announcement, it has bought about $44 billion of Treasuries.

The Fed grew its balance sheet substantially last year and into this year, primarily buying mortgage-related securities along with some Treasuries in an effort to lower borrowing costs and shore up the economy.

While Friday’s non-farm payrolls numbers increased some expectations for more quantitative easing, comments from Fed officials this week also boosted speculation of more central bank asset purchases.

“After extremely dovish comments by New York Fed President (William) Dudley and Chicago Fed President (Charles) Evans this past week and with the continued weak job numbers, we now think the most likely scenario is that the Fed starts QE2 in November,” said Ethan Harris, North American economist with Bank of America Merrill Lynch in New York, adding “at this point, it would take some very strong data to stop Fed action, which seems unlikely.”

While expectations rose that the Fed will move ahead with easing, more economists also called for the central bank to hold interest rates at their current level near zero through all of next year.

Fourteen of the 16 primary dealers who responded said the Fed would keep rates steady through at least 2011, compared with nine of 15 respondents forecasting steady rates through next year in the September poll.

Two of the 18 primary dealers did not respond to the Reuters poll.

Additional reporting by Pam Niimi, Richard Leong and Emily Flitter; Editing by

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