Bloomberg News

Bernanke Seen Keeping Up Pace of QE Until Fourth Quarter

March 20, 2013

U.S. Fed Chairman Ben S. Bernanke

Ben S. Bernanke, chairman of the U.S. Federal Reserve, will ultimately buy a total of $600 billion in mortgage bonds and $545 billion in Treasuries in the round of bond buying that began in September, according to the median of responses in the March 13-18 survey. Photographer: Andrew Harrer/Bloomberg

Chairman Ben S. Bernanke will probably start reducing the Federal Reserve’s $85 billion in monthly bond buying no earlier than the fourth quarter of 2013, economists said in a Bloomberg survey.

The Fed chief will probably halt the unprecedented easing in the first half of next year after expanding central bank assets to a record of about $4 trillion, according to median estimates by 46 economists surveyed March 13-18 before a two-day meeting of policy makers ending today. Unemployment (USURTOT) will have fallen to 7.3 percent from its current 7.7 percent when the Fed starts to pull back on its buying, the economists said.

By slowly trimming purchases, Bernanke will retain the flexibility to ramp up the accommodation again if needed and avoid jolting the weak economic expansion with a sudden cutoff in stimulus, said Roberto Perli, a former economist for the Fed’s Division of Monetary Affairs.

“They will want to be gradual” in reducing accommodation, said Perli, managing director at International Strategy & Investment Group Inc. in Washington. Fed officials will probably proceed “on a meeting-to-meeting basis and say, ‘conditions have improved, we’ve seen progress, we can slow the pace,’ then reconvene at the next meeting and see what happened.”

Bernanke has pledged to press on with a program buying $40 billion a month of mortgage bonds and $45 billion in Treasuries until the labor market improves “substantially.” The FOMC plans to release a statement at 2 p.m. today in Washington, and Bernanke plans to hold a press conference at 2:30 p.m.

Housing Rebound

While gains in the job market, a housing rebound and record-high stock prices have buoyed consumer sentiment, the economy will grow 2 percent in the first quarter compared with 2.2 percent in 2012, according to the median estimate of 85 economists in a separate Bloomberg survey.

Bernanke will ultimately buy a total of $600 billion in mortgage bonds and $545 billion in Treasuries in the round of bond buying that began in September, according to the median of responses in the March 13-18 survey.

Bernanke’s counterpart, Bank of England Governor Mervyn King, was defeated for a second month in a vote to expand stimulus as the majority of policy makers said more bond purchases may erode their credibility and push the pound lower.

The Monetary Policy Committee voted 6-3 to keep the target for buying at 375 billion pounds ($566 billion), the central bank said in minutes of its March 7 meeting, published in London today. King, David Miles and Paul Fisher wanted a 25 billion- pound increase, repeating their push from February.

Market Gains

Substantial job-market gains will probably prompt the Fed to eventually end asset purchases, according to 64 percent of surveyed economists. Nineteen percent disagreed, saying policy makers will halt so-called quantitative easing because of diminishing returns from bond buying, compared with 10 percent in a Jan. 24-25 survey.

Inflation has receded as a force that would compel policy makers to pull back on asset purchases, with 2 percent of economists surveyed seeing it as leading to an end of bond buying, compared with 13 percent in the Jan. 24-25 survey.

Prices climbed by 1.2 percent in the year through January, according to the Fed’s preferred inflation gauge, the personal consumption expenditures price index. Since April, the index has been below 2 percent, which is the Fed’s long-run goal for inflation.

“Inflation’s not a particularly credible threat right now,” said Eric Lascelles, the Toronto-based chief economist at RBC Global Asset Management Inc., which oversees about $270 billion. “The amount of economic slack is still enormous, and inflation can’t survive in that kind of environment where there’s no wage-price spiral.”

No Cut

Fifty-eight percent of economists surveyed said officials won’t reduce buying until the fourth quarter or later, while 55 percent said they expect the Fed to end its quantitative easing entirely in the first half of next year.

Tapering bond buying probably won’t impair growth, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank AG in New York.

“It’s not like tapering QE would do much damage,” he said. “We would still have plenty of accommodation even if the Fed were to reduce QE by half.”

Sixty percent of the economists said the current stance of policy is either somewhat too easy or much too easy given the outlook for the economy, compared with 58 percent in the January survey.

Bernanke on Feb. 26 rebuffed a lawmaker’s effort to label him as a monetary policy “dove” who favors full employment over ensuring price stability.

Post-War Period

“My inflation record is the best of any Federal Reserve chairman in the postwar period -- at least one of the best, about 2 percent average inflation,” Bernanke said at his semi- annual testimony to Congress, responding to a comment by Senator Bob Corker, a Republican from Tennessee.

The Fed chief also defended asset purchases, telling lawmakers in two days of testimony that the benefits of lower borrowing costs and faster growth outweigh any potential costs.

Bernanke and his policy making colleagues are debating how to slow their asset purchases amid concern the unprecedented stimulus may encourage asset-price bubbles and complicate the Fed’s eventual withdrawal of stimulus.

The minutes of the Dec. 11-12 meeting showed a divide among FOMC participants on how long the purchases should last. 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, the record released Jan. 3 showed.

Vary Pace

At the Jan. 29-30 FOMC meeting, several policy makers said the Fed should be ready to vary the pace of bond purchases, the minutes of the gathering released Feb. 20 show.

Bernanke said in congressional testimony that quantitative easing has helped revive the housing market. The average 30-year fixed rate mortgage was 3.63 percent as of March 14, Freddie Mac data show, after falling as low as 3.31 percent in November.

New U.S. home construction rose in February to 917,000 (NHSPSTOT) homes at an annual rate, while building permits advanced 4.6 percent to 946,000 (NHSPATOT), the highest level in almost five years, the Commerce Department said yesterday.

Home prices gained 6.8 percent from a year earlier in December, according to the Case-Shiller 20 City index, the fastest increase since 2006. New home sales accelerated in January to a 437,000 (NHSLTOT) annual pace, the highest since July 2008.

‘Coming Back’

Housing is “coming back, it’s real, and it’s going to be a positive driver,” Jeff Fettig, the chief executive officer of Whirlpool Corp. (WHR:US), the world’s largest appliance maker, said at a conference on March 13. “For every 6 percent increase in existing-home sales you see a 1 percent demand increase in appliances.”

The Fed’s bond buying has also coincided with a stock market boom. The Dow Jones Industrial Average has risen to successive all-time highs this month, surpassing its prior record in October 2007.

The 30-stock (INDU) benchmark for the biggest U.S. companies climbed 0.5 percent to 14,531.15 at 9:54 a.m. in New York, extending its advance this year to 11 percent. The yield on the 10-year Treasury note increased five basis points to 1.94 percent.

To contact the reporters on this story: Jeff Kearns in Washington at jkearns3@bloomberg.net; Joshua Zumbrun in Washington at jzumbrun@bloomberg.net; Catarina Saraiva in Washington at asaraiva5@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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