Federal Reserve Chairman Ben S. Bernanke’s latest round of bond buying will reach $1.14 trillion before he ends the program in the first quarter of 2014, according to median estimates in a Bloomberg survey of economists.
Bernanke will push on with purchases of $40 billion a month of mortgage bonds and $45 billion a month of Treasuries, according to the survey of 44 economists, even as some Fed officials warn his unprecedented balance-sheet expansion will impair efforts to tighten policy when necessary.
“To get to the point where Bernanke would be comfortable letting up, you have to have a good solid string of economic reports that you’re just not going to get” this year, said Eric Green, global head of rates and FX research at TD Securities Inc. in New York and a former New York Fed economist.
The Federal Open Market Committee will renew its commitment to asset buying during a two-day meeting that began today, after determining the benefits from the program exceed any risk of inflation or financial instability, according to economists surveyed Jan. 24-25. Bernanke has said the policy will continue until there are “substantial” gains in employment.
Fed officials have a brighter outlook for the economy than many private economists. FOMC participants forecast growth this year ranging from 2.3 percent to 3 percent, while economists in a separate Bloomberg survey have a median estimate of 2 percent.
“The economy is not going to be able to generate growth above 2 percent” as it faces headwinds from federal tax increases and a weak global expansion, Green said.
Fed asset purchases will probably do little to help reduce 7.8 percent unemployment, economists said, with 57 percent of them predicting the program won’t help boost the number of jobs created this year.
Economists who expect gains from so-called quantitative easing say it will account for an increase of 250,000 jobs during 2013. Last year, the economy added 1.8 million jobs.
Employers probably hired 160,000 workers in January, after a 155,000 increase in December, based on Bloomberg News survey of economists before the Labor Department reports the figures on Feb. 1.
In the first round of purchases, begun in 2008, the Fed bought $1.4 trillion of housing debt and $300 billion of Treasuries. In the second round, beginning in November 2010, the Fed bought $600 billion of Treasuries.
In the current round, the Fed’s total purchases will be split between $600 billion of mortgage-backed securities and $540 billion of Treasuries, according to the median estimates of economists in the survey.
Asked what would prompt the Fed to halt its bond buying, 63 percent of economists said the central bank will act in response to substantial improvement in the labor market.
Only 13 percent said the Fed will end its purchases because of accelerating inflation or a rise in inflation expectations.
Inflation for the 12 months ending in November was 1.4 percent, according to the Fed’s preferred gauge. That’s below the central bank’s longer-run target of 2 percent. Investors expect inflation of 2.24 percent over the next five years, compared with 2.1 percent when the FOMC met Dec. 11-12, as measured by the spread between Treasury Inflation Protected Securities and nominal bonds.
At the FOMC’s meeting last month, participants differed over how long the bond purchases should last. Fed officials who provided estimates were “approximately evenly divided” between those who said it would be appropriate to end the purchases around mid-2013 and those who said they should continue beyond that date, according to minutes of the gathering.
A number of policy makers are concerned the size of the Fed’s holdings “could complicate the committee’s efforts to eventually withdraw monetary policy accommodation,” according to the minutes.
The percentage of economists who consider monetary policy “somewhat too easy” rose to 40 percent compared with 27 percent in a survey prior to the FOMC’s Dec. 11-12 meeting.
Boston Fed President Eric Rosengren, an FOMC voter this year, sees Fed accommodation working, citing recent improvement in the housing market and in auto sales.
“The most interest-sensitive sectors have been responding to the monetary stimulus from the Fed, and this stimulus has provided a major source of strength for the economy last year,” Rosengren said in a Jan. 15 speech in Providence, Rhode Island. “And it is likely to be a source of support in 2013.”
In December, light vehicles sold at an annualized pace of 15.3 million, down slightly from November’s pace of 15.46 million, which was the highest since 2008. Builders broke ground on new homes at an annual pace of 954,000 last month, also the highest since 2008.
“Housing data continue to corroborate that something real is going on here, that housing has turned the corner,” said Josh Feinman, the New York-based global chief economist for DB Advisors, the Deutsche Bank AG asset management unit that oversees about $228 billion, and a former Fed economist. “That’s been a huge headwind obviously holding us back.”
The S&P/Case-Shiller index of home prices in 20 U.S. cities increased 5.5 percent in the 12 months to November, the biggest year-over-year gain since August 2006, according to data released today.
An improving economic outlook and rising corporate earnings have helped drive stock indexes to the highest levels in more than five years.
The Standard & Poor’s 500 Index climbed 0.5 percent to 1,507.84 at the close of trading in New York. The yield on the 10-year Treasury note rose 0.04 percentage point to 2 percent, matching the highest level since April.
St. Louis Fed President James Bullard and Kansas City’s Esther George are among regional bank presidents voicing concern about the risks from bond buying, which this month pushed the balance sheet above $3 trillion for the first time.
Bullard told reporters in Madison, Wisconsin, on Jan. 10 that the Fed’s stance is “a very aggressive policy, and it is making me a little bit nervous that we’re over-committing to easy policy.”
George said in a Jan. 10 speech in Kansas City, Missouri, that “a prolonged period of zero interest rates may substantially increase the risks of future financial imbalances.”
George, Bullard and Rosengren, along with Chicago Fed President Charles Evans, assume voting seats on the committee this year in an annual rotation among the district bank presidents.
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