U.S. Federal Reserve Chairman Ben S. Bernanke could unexpectedly raise monthly bond purchases to signal concern over slowing inflation, according to Norwegian money manager Skagen AS.
U.S. policy makers have debated this year when to begin winding down bond purchases known as quantitative easing. The Fed announced $40 billion in monthly purchases of mortgage backed securities in September and added $45 billion of Treasury purchases in December. At the current pace, the Fed’s balance sheet will hit $4 trillion by year-end.
“Bernanke will say that since inflation is low and inflation expectations are dropping, we might need to hold the policy lower for longer than previously anticipated,” Torgeir Hoien, a fixed-income manager and former official at Norway’s central bank, said today in an Oslo interview. “They might even increase the scale of quantitative easing as a signaling device to tell markets that inflation that’s too low -- and heading even lower -- is a problem.”
Policy makers wrapping up a meeting today will probably wait to reduce bond buying until its Oct. 29-30 meeting, according to the median estimate in a June 4-5 Bloomberg survey of 59 economists. Inflation will be accelerating toward the target by then, picking up to 1.3 percent in the third quarter and 1.5 percent in the fourth quarter, the economists estimate.
The Fed will issue a statement at 2 p.m. in Washington.
A gauge of consumer prices excluding food and energy that is watched by the Fed rose an annual 1.1 percent in April, matching the smallest gain since at least 1960. With inflation below the Fed’s 2 percent long-run goal and unemployment at 7.6 percent, the Fed is falling short of its mandate to ensure stable prices and maximum employment. The bank has pledged to keep rates near zero as long as unemployment is above 6.5 percent and the inflation outlook is no more than 2.5 percent.
Bonds have slumped since last month when Bernanke said the U.S. central bank could reduce its $85 billion in monthly bond purchases if there’s sustainable improvement in employment in the world’s largest economy.
Hoien manages the Skagen Tellus (STELLUS) fund, Norway’s second-best performing bond fund this year, according to data compiled by Bloomberg. It has returned 4.2 percent this year and 7.7 percent over the past 12 months.
Hoien said he doesn’t see any effect on inflation from any potential adjustment in the bond buying program.
“What’s relevant is what they are going to do about the policy rate,” he said. “They really can’t cut the rate anymore.”
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