Goldman Sachs Group Inc. and Bank of America Corp. say a weaker-than-forecast June jobs gain in the U.S. will lead the Federal Reserve to keep its benchmark interest rate at almost zero until the middle of 2015.
The Fed, which has pledged to hold the rate low through at least late 2014, will amend its so-called forward guidance before deciding on a new round of bond purchases, according to the companies. Goldman Sachs and Bank of America are two of the 21 primary dealers that trade directly with the central bank.
“The ‘late 2014’ formulation has now ‘aged’ by six months since it was first adopted, but the economy still looks no better,” Jan Hatzius, the chief economist at Goldman Sachs in New York, wrote in a report yesterday. The central bank may announce the change as soon as its next policy meeting July 31 to Aug. 1, Hatzius wrote.
Chairman Ben S. Bernanke faces jobs growth that slowed in the second quarter to one-third the pace of the prior three months. The gain in June was 80,000, the Labor Department reported July 6, versus 100,000 projected by a Bloomberg News survey of economists. Bernanke hasn’t ruled out more bond purchases, and he said June 20 that more easing probably will be needed unless there is “sustained improvement in the labor market.”
The Fed bought $2.3 trillion of securities in two rounds of so-called quantitative easing, known as QE1 and QE2, from 2008 to 2011 to support the economy. In September it embarked on a plan to replace $400 billion of short-maturity Treasuries in its portfolio with longer-term debt to cap long-term borrowing costs. It expanded the effort, known as Operation Twist, on June 20 by $267 billion and extended it until year-end.
The policy setting Federal Open Market Committee will probably implement a new round of asset purchases when Operation Twist ends, according to Hatzius.
Data on retail sales, industrial production and orders for durable goods will determine when the Fed acts, Michelle Meyer and Joshua Dennerlein, economists at Bank of America in New York, wrote in their report July 6.
“In our view, the next step is to push out the forward guidance from late-2014 to mid-2015, followed by further asset purchases of $500 billion,” the economists said.
Benchmark 10-year Treasury yields declined one basis point today to 1.54 percent as of 7:20 a.m. in London, according to Bloomberg Bond Trader data. They are approaching the all-time low of 1.44 percent set June 1. The price of the 1.75 percent security due in May 2022 rose 3/32, or 94 cents per $1,000 face amount, to 101 30/32.
The difference between the Fed’s target for overnight bank lending, known as the funds rate, and five-year yields is shrinking. The spread has narrowed to 38 basis points from this year’s high of 94 basis points in March. The gap was 37 basis points on June 1, the least since 2008.
The difference between the Fed rate and 10-year yields narrowed to 1.29 percentage points from 2.13 in March. Money managers usually demand higher rates to invest for longer terms.
“Forward guidance brings down bond yields not only via a lower expected funds rate, but also via a smaller term premium,” Goldman’s Hatzius wrote.
Ward McCarthy, chief financial economist at Jefferies & Co. in New York, predicts the Fed will announce QE3 at its December meeting, unless the sovereign-debt crisis in Europe or political wrangling over the budget deficit in the U.S. curtails growth and prompts action sooner. Jefferies is another primary dealer.
“They’re not even forecasting sustained improvement in the labor market, so my interpretation of that is that they expect to do more,” McCarthy said. “There’s no reason to do it now that they’ve already put something else in place.”
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