Fed seen starting QE3 as it extends zero-rate forecast

The Federal Reserve is likely to announce a third round of bond purchases tomorrow, according to almost two-thirds of economists in a Bloomberg survey, while also extending the duration of its zero-interest-rate policy into 2015.

Chairman Ben S. Bernanke and his colleagues on the Federal Open Market Committee will once again roll out unconventional policies to bolster economic growth of less than 2 percent in the second quarter and bring down unemployment stuck above 8 percent for 43 straight months, the survey showed.

“The Fed clearly wants to do more,” said Nick Sargen, a former San Francisco Fed economist who oversees $40 billion as chief investment officer at Fort Washington Investment Advisors in Cincinnati. “The economy is looking lackluster, and the Fed has said all along that they feel it’s almost immoral that the unemployment rate is as high as it is.”

Two rounds of bond purchases totaling $2.3 trillion have failed to breathe life into the labor market, which Bernanke said last month is a “grave concern.” That means policy makers will probably announce a new open-ended plan tied to a sustained improvement in the economy rather than specify an amount of purchases and an end-date, according to 32 of the 73 economists in the survey. Twenty-two expect a fixed duration and amount.

The FOMC plans to release a statement tomorrow at about 12:30 p.m. after a two-day meeting. At 2 p.m. the Fed will release policy makers’ forecasts for unemployment, inflation and the expected path of the federal funds rate over the next several years. Bernanke plans to hold a press conference at about 2:15 p.m.

Europe Crisis

The euro strengthened to a four-month high and stocks rose for a second day as a German court allowed ratification of a bailout fund, easing the European credit crisis that the Fed has identified as a threat to the U.S. expansion.

The euro appreciated 0.3 percent to $1.2896 at 10:26 a.m. in New York. The Stoxx Europe 600 Index added 0.3 percent, and the Standard & Poor’s 500 Index increased 0.2 percent.

In the U.K. today, a report showed that jobless claims unexpectedly fell the most in more than two years in August as the economy continued to create jobs in the face of a recession.

Stocks and commodities have rallied on expectations of easing by the Fed. From Aug. 1 through yesterday, the S&P 500 rose 4.3 percent to 1,433.56, near the four-year high reached last week. The S&P GSCI Spot Index that tracks the price of 24 commodities advanced 6.8 percent.

Most economists predict that in a new round of easing the Fed would buy a mix of Treasury notes and mortgage-backed securities.

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