Fed seen by economists tapering QE at September meeting

Federal Reserve Chairman Ben S. Bernanke will cut the Fed’s $85 billion in monthly bond purchases by $20 billion at the Sept. 17-18 policy meeting, according to 44% of economists in a Bloomberg survey.

The survey of 54 economists followed Bernanke’s press conference yesterday, in which he mapped out a timetable for an end to one of the most aggressive easing strategies in Fed history. His remarks prompted economists to predict a faster reduction in purchases: in a June 4-5 survey, only 27% of economists forecast tapering would start in September.

Bernanke, speaking after a two-day meeting by the Federal Open Market Committee, said the Fed may begin dialing down its unprecedented bond-buying this year and end it in mid-2014 if the economy achieves the Fed’s objectives. Policy makers are forecasting growth of as much as 2.6% this year and 3.5% in 2014.

“The committee, and even Bernanke’s remarks, showed a surprising degree of confidence in the outlook,” said Michael Feroli, chief U.S. economist for JPMorgan Chase & Co. in New York and a former Fed economist. “I’m a little more surprised that they were willing to signal they’re on the path of moving out of this set of Fed policies.”

Fed Taper

Fifteen% of economists in the survey said the Fed will taper in October and 28% said policy makers will wait until December. The remaining 13% said the Fed won’t begin reducing its pace of purchases until at least next year.

The central bank’s forecasts for growth are more optimistic than Wall Street’s. The median estimate of private forecasters in a Bloomberg survey calls for an expansion of 1.9% this year and 2.7% next year.

The amount of initial tapering predicted by economists in the most recent survey was unchanged from the prior one. The central bank will halt bond buying entirely in June 2014, according to 44% of the economists in the latest survey.

If economic data are consistent with the Fed’s forecasts, “the committee currently anticipates that it would be appropriate to moderate the pace of purchases later this year,” Bernanke said at the press conference. “We will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year.”

Stocks and gold fell and Treasury yields rose for a second day as investors face the prospect of a wind-down in the Fed’s asset purchases. The Standard & Poor’s 500 Index dropped 2.1% to 1,594.32 at 2:48 p.m. in New York, after falling 1.4% yesterday. Treasury yields rose to 2.43% from 2.35% yesterday and 2.19% on June 18. Gold fell below $1,300 an ounce to the lowest since September 2010.

Financial Assets

The impact of tapering is largely reflected in prices of financial assets, said Jonathan Wright, an economics professor at Johns Hopkins University in Baltimore who worked at the Fed’s division of monetary affairs from 2004 until 2008.

“Saying that the Fed will taper later this year tightens financial conditions right now -- a risky strategy when the economy is only just gaining a bit of momentum.”

The U.S. central bank began its third round of large-scale asset purchases in September by buying $40 billion a month of mortgage-backed securities. The Fed added $45 billion of Treasury purchases in December. The FOMC has said since September that it will buy bonds until seeing signs of substantial labor-market improvement.

Winding Down

Reducing stimulus and winding down the balance sheet without roiling markets is one of the biggest challenges Bernanke’s successor would face, should the chairman not serve a third, four-year term. President Barack Obama said this week that Bernanke has stayed in his post “longer than he wanted,” one of his clearest signals yet the Fed chief will leave.

Fed Vice Chairman Janet Yellen is the likeliest candidate to replace Bernanke when his term ends in January of 2014, according to economists in the survey. The economists assigned Yellen a 65% chance of ascending to the top job at the central bank.

Former Treasury Secretary Timothy F. Geithner was assigned a 10% chance of becoming the next chairman and former Obama adviser Lawrence Summers, Treasury secretary under President Bill Clinton, was given 9% odds.

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