Federal Reserve officials may strengthen their commitment to record monetary stimulus as soon as today after a faltering economic recovery and a US credit-rating cut provoked a rout in global stocks.
By a 52 per cent to 48 per cent margin, respondents in a Bloomberg News survey said the Fed would ease policy this year through monetary tools or statement language. If the central bank acts, 59 per cent said it would communicate that the federal funds rate, balance sheet or both will remain especially stimulative for a longer period or more specific amount of time.
Chairman Ben S Bernanke and his colleagues are weighing the use of more untested policy tools after two rounds of bond buying totaling $2.3 trillion failed to spur sufficient economic growth and reduce unemployment below nine per cent. The Federal Open Market Committee (FOMC) holds its meeting today in Washington following the worst day for US stocks since December 2008.
“The odds of more dramatic action are higher,” said Vincent Reinhart, a former chief monetary policy strategist at the Fed. “However, they might not want to be seen as responding so directly to equity prices,” Reinhart said, adding that policymakers may wait to signal a new round of bond purchases until Bernanke gives a speech on August 26 at a Fed conference at Jackson Hole, Wyoming. Reinhart is a resident scholar at the American Enterprise Institute in Washington.
The FOMC plans to issue a statement at about 2.15 pm New York time. Julia Coronado, chief economist for North America for BNP Paribas in New York, said the central bank may say today the economic slowdown is persisting longer than expected. Policymakers may also say the Fed’s securities portfolio will remain at a record for an “extended period” and replace shorter-term securities with longer maturities to reduce rates on longer-term debt, she said. The Fed reiterated in June that the overnight interbank lending rate would be “exceptionally low” for an “extended period” and said the policy of reinvesting maturing securities to keep the balance sheet steady would be maintained, without saying how long.
The “extended period” phrase means that the FOMC is at least two or three meetings away, or “significantly longer,” from taking any action, Bernanke said at a June press conference.
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Bernanke isn’t scheduled to hold a press briefing today, unlike after the June 21-22 policy meeting. He holds news conferences only after two-day meetings, when the Fed releases updated economic forecasts. Forecasts are next scheduled for release after the November 1-2 gathering. On such days, the Fed releases its announcement at around 12.30 pm.
The drop in global stocks, further fueled by concerns over Europe’s debt crisis, adds to pressure on the Fed, which is confronting a slowing US economy and unemployment stuck above nine per cent.
The Standard & Poor’s 500 Index tumbled 6.7 per cent yesterday to 1,119.46 in New York trading, its biggest decline since December 2008.
Today, US stock index futures rose, European shares erased losses and treasuries fell.
Standard & Poor’s 500 Index futures added 2.3 per cent at 7.23 am in New York, after losing as much as 3.2 per cent. The Stoxx Europe 600 Index gained 0.4 per cent, reversing declines of as much as 5.1 per cent. Treasuries, the benchmarks for the $34 trillion US debt market that is more than twice the value of American equities, fell. The 10-year note yield was up eight basis points at 2.40 per cent.
Asked which step the Fed would most likely take first, 59 per cent of 51 respondents said the central bank would alter language in the FOMC statement.
Deposits on Reserves
Another 22 per cent said the Fed would increase the average maturity of its securities holdings, 18 per cent said it would buy more assets and 12 per cent see the Fed lowering the 0.25 per cent interest rate paid on banks’ excess reserve deposits. The total exceeds 100 per cent because some economists said the first step would involve two actions.
Economists were divided on whether the Fed would act now, with 35 per cent of 46 respondents saying the easing step would come today and 39 per cent predicting a move at the next meeting September 20. Fifteen per cent saw a potential decision at the November 1-2 meeting, and the remaining 11 per cent said sometime after the December 13 session.
The Fed is likely to start a third round of asset purchases, and “they certainly should do something right away,” said Kenneth Rogoff, a Harvard University economics professor and former Fed researcher who attended graduate school with Bernanke. It’s not clear if Bernanke would have the support of the Federal Open Market Committee, Rogoff said.
‘More Decisively’
“It’s going to move more decisively” than in the first two rounds, Rogoff said in an interview with Bloomberg Television. He recommended the Fed say it’s trying to create “moderate inflation” and avoid repeating that officials are trying to boost stocks.
The survey of 58 economists was conducted Aug. 5-8 by e- mail and completed at around noon yesterday. Given the opportunity to change answers after S&P cut the U.S.’s AAA credit rating on Aug. 5, one respondent altered a forecast.
The Fed’s meeting comes two days after central bankers and finance ministers from the Group of Seven nations pledged to “take all necessary measures to support financial stability and growth.” The officials said they would pump money into the global economy and take other steps if warranted.
G-7 Statement
The G-7 statement followed a pledge by the European Central Bank to “actively implement” its bond-purchase program. The ECB started buying Italian and Spanish assets yesterday in its riskiest attempt yet to tame the continent’s sovereign debt crisis.
While Fed officials may weigh whether to undertake a third round of government bond purchases to spur growth, they probably won’t announce a new program today, respondents said. In fact, a majority of economists said in the Bloomberg survey that a third round of quantitative easing won’t happen.
Forty-two percent of 52 respondents said more bond purchases are very unlikely, and 29 percent see them as somewhat unlikely. Of the 29 percent who see such a move as likely, 13 percent say the probability is more than 75 percent, and 15 percent say the chance is 50 percent to 75 percent. In Bloomberg’s June survey, 7 percent of analysts said a third round of bond buying, or QE3, was likely.
Panic Threat
Such a step may backfire because it could panic investors by signaling the economy is in worse shape than the Fed thought, said Lynn Reaser, chief economist at Point Loma Nazarene University in San Diego, California, and a board member of the National Association for Business Economics.
The Fed in June completed a $600 billion Treasury bond- purchase program aimed at reducing long-term borrowing costs on everything from car loans to mortgages and boosting share prices.
Even with the purchases, the economy grew in the first six months of this year at the weakest pace since the recovery started in 2009. After almost stalling at a 0.4 percent annual pace in the first three months of this year, the economy expanded at a 1.3 percent rate last quarter, the government reported on July 29.
“I’m sure they’re facing a tough decision here about what steps they should take,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida. “These things are kind of marginal at this point, but every little bit would help.”