Bloomberg News

Bernanke Seen Slowing QE to $65 Billion in September

July 23, 2013

U.S. Fed Chairman Ben S. Bernanke

Ben S. Bernanke, chairman of the U.S. Federal Reserve, said in his testimony the Fed could keep buying bonds for longer if “financial conditions -- which have tightened recently -- were judged to be insufficiently accommodative to allow us to attain our mandated objectives.” Photographer: Pete Marovich/Bloomberg

Federal Reserve Chairman Ben S. Bernanke in September will trim the Fed’s monthly bond buying to $65 billion from the current pace of $85 billion, according to a growing number of economists surveyed by Bloomberg News.

Half of economists held that view in the July 18-22 survey, up from 44 percent in last month’s poll. Even as expectations of a September taper rose, 10-year Treasury yields continued to fall last week from an almost two-year high after Bernanke said reducing bond-buying wouldn’t constitute policy-tightening.

“The markets have adjusted to the new information that the Fed is likely to reduce purchases over the near term, and they’ve come to terms with it,” said Russell Price, senior economist at Ameriprise Financial Inc. (AMP:US) in Detroit. “Investors believe it won’t be a strong negative for the markets or the economy.”

None of the 54 economists surveyed expects the Federal Open Market Committee to begin paring its purchases at its meeting scheduled for July 30-31. In its first trim, the FOMC will probably cut monthly bond buying by $20 billion, with purchases divided between $35 billion in Treasuries and $30 billion in mortgage-backed securities, according to the median estimate of economists.

The central bank will probably halt the asset purchases in the second quarter of next year, according to half of the economists. Twenty-four percent forecast the FOMC will end so-called quantitative easing in the third quarter of 2014.

Third Round

The Fed will buy a total $1.32 trillion in bonds at the completion of its third round of bond buying, according to the median estimate. The FOMC began with $40 billion in monthly mortgage bond purchases in September and added $45 billion in monthly Treasury purchases in December.

The yield on the 10-year Treasury note soared to an almost two-year high of 2.75 percent on July 8 from 2.19 percent on June 18, the day before Bernanke said the Fed may consider reducing bond purchases this year if the economy performs in line with the central bank’s forecast.

The yield fell 0.04 percentage point to 2.49 percent on July 17, when Bernanke told a congressional panel that he hasn’t put bond purchases “on a preset course” but will adjust them based on economic data. The yield rose 0.02 percentage point to 2.5 percent at 4:23 p.m. in New York.

‘Moderate’ Pace

“It would be appropriate to begin to moderate the monthly pace of purchases later this year” if economic data match Fed forecasts, Bernanke told lawmakers. “If the subsequent data continued to confirm this pattern of ongoing economic improvement and normalizing inflation, we expected to continue to reduce the pace of purchases in measured steps through the first half of next year, ending them around midyear.”

The Fed chairman plans to hold his next press conference after the FOMC’s Sept. 17-18 meeting, when Fed officials will next update their forecasts for the growth, unemployment and inflation.

Fed Governor Jeremy Stein, in a speech last month, identified the September meeting as a possible time for altering the pace of asset purchases.

The FOMC should “be clear that in making a decision in, say, September, it will give primary weight to the large stock of news that has accumulated since the inception of the program,” Stein said on June 28 in New York. The Fed should “not be unduly influenced by whatever data releases arrive in the few weeks before the meeting -- as salient as these releases may appear to be to market participants.”

‘Much Fixated’

Stein’s speech “was very much fixated on September,” said Laura Rosner, a U.S. economist at BNP Paribas SA in New York and a former researcher at the Federal Reserve Bank of New York. Bernanke’s semi-annual testimony to Congress last week “softened the schedule and brought back the data dependence that Stein reduced,” she said, referring to Bernanke’s comment that the FOMC will alter buying based on fresh economic indicators.

Fifty-one percent of survey respondents said monetary policy is too easy, compared with 10 percent who said that the current stance is too tight. The Fed has pushed up its balance sheet to $3.54 trillion through bond buying and held its benchmark interest rate near zero to cut lending costs, spur growth and combat unemployment.

The jobless rate has fallen to 7.6 percent, while payrolls have risen an average of 201,830 jobs per month over the past six months. U.S. employers expanded payrolls by 195,000 in June for a second straight month, the Labor Department said July 5, capping 12 months of advances above 100,000 for the longest such streak since May 2000.

Substantial Improvement

Bernanke reiterated last week that the FOMC will buy bonds until seeing signs of substantial labor-market improvement.

“Job growth is strong,” said Thomas Costerg, an economist at Standard Chartered Plc in New York, who expects the FOMC in September to reduce monthly purchases to $75 billion. “If we continue to see some strong nonfarm payroll data and the housing market continues to be good they would probably go in September,” he said, referring to the FOMC’s first tapering.

The proportion of unemployed workers who have been without a job for six months or more has fallen to less than 37 percent from about 40 percent when Bernanke launched the current round of quantitative easing in September.

“September is about as long as they can wait” to taper, said Christopher Low, the chief economist at FTN Financial in New York, who expects the Fed to cut monthly purchases to $65 billion in September.

‘Measured Steps’

“Bernanke’s commitment to cut gradually in a series of measured steps implies that this isn’t the kind of thing they’ll do in three months,” he said. “It requires more time than that because they want to gauge the economic impact as they scale it back.”

Fifteen percent of economists expect the FOMC to make its first cut in bond buying at its Oct. 29-30 meeting, while 28 percent forecast the move at the Dec. 17-18 gathering, the date of Bernanke’s final scheduled press conference for the year.

“Tapering doesn’t mean that they’re any closer to raising the funds rate,” said Stuart Hoffman, chief economist at Pittsburgh-based PNC Financial Services Group Inc., referring to the benchmark interest rate.

Bernanke “is trying to say there’s a big difference between ending our QE and the time when we would raise the funds rate, which would be considerably after QE ends,” he said.

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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