The Federal Reserve will probably
revise its pledge to keep interest rates close to zero through
mid-2013 as the need for large scale asset purchases diminishes,
according to economists in a Bloomberg News survey.
The Fed will alter the interest rate commitment before June,
according to 64 percent of economists surveyed, with 51 percent
saying the central bank will abandon the option of a third round
of buying bonds, or so-called QE3.
Chairman Ben S. Bernanke and his policy-making colleagues
plan to meet today to discuss the outlook for an economy that
has strengthened since their November meeting, lowering the
jobless rate to 8.6 percent from 9.1 percent. Altering the low-
rate commitment would give central bankers the flexibility to
adjust monetary policy without resorting to a third round of
large-scale bond purchases, also known as quantitative easing.
“The base case is that QE3 probably will not unfold,”
said Sam Bullard, senior economist at Wells Fargo Securities in
Charlotte, North Carolina. “We’ve got some momentum here. The
data that’s been coming in has been stronger than expected and
prior months’ data have been revised up.”
Before the Fed’s November gathering, 69 percent of
economists in a Bloomberg News survey said they believed the Fed
would begin more purchases, as did 16 of the 21 primary dealers
of US government securities in a survey last month.
The Federal Open Market Committee is set to release a
statement at around 2:15 pm Washington time, following its
last scheduled meeting of the year.
Target Rate
The Fed reduced its target interest rate to a range of zero
to 0.25 percent in December 2008. In August the FOMC said
economic conditions would probably warrant leaving rates near
zero through at least mid-2013, replacing an earlier pledge to
keep them there for a “considerable period.”
The central bank purchased $2.3 trillion of bonds in two
rounds from December 2008 to June 2011. In September it
announced it would buy $400 billion of longer-term government
securities and sell $400 billion of short-term debt in order to
lengthen the average maturity of securities on its balance sheet.
The yield on the 10-year Treasury fell to a record low 1.72
percent on Sept. 22, the day after the central bank announced
the maturity-lengthening program known as Operation Twist. The
yield was 2.01 percent late yesterday in New York.
A plurality of 44 percent of economists expect the central
bank to wait until their Jan. 25-26 meeting to revise their
pledge to hold interest rates near zero through mid-2013. Fifty-
one percent say the central bank will use that meeting to unveil
a “broader overhaul” of their strategy for communicating with
the public about policy, including the path of interest rates.
‘Full Scope’
While policy makers in their statement today may hint at
such changes, they probably won’t provide “a complete sense of
the full scope of the new communications strategy until
January,” said Robert Dye, chief economist at Comerica Inc. in
Dallas. Bernanke is scheduled to hold a news conference after
the meeting next month.
By holding interest rates near zero, the central bank has
helped push down mortgage rates to record lows. The national
average for a 30-year fixed-rate mortgage was 3.99 percent as of
Dec. 8, according to a Freddie Mac index. The index touched a
record low 3.94 percent on Oct. 6.
“Eventually the economy has to be weaned off of these
steroids, and if we just keep throwing more and more stimulus at
it, the economy will never find its own legs without risking
some sort of inflation flare-up,” said Carl Riccadonna, senior
US economist at Deutsche Bank Securities Inc. in New York.
Home Purchases
Low interest rates aren’t prompting home purchases by
consumers concerned about the outlook for the economy, said
Robert I. Toll, chairman of Toll Brothers Inc., the largest US
luxury homebuilder.
“Our customers have the ability to buy,” Toll said.
“They are aware of the tremendous affordability of homes and
the record-low interest rates. However, a lack of confidence in
the direction of the economy is perhaps the biggest impediment
to releasing what we believe is significant pent-up demand.”
While tracking household spending, Fed policy makers are
also watching the sovereign-debt crisis in Europe for signs that
they need to shift policy. In a statement after their Nov. 1-2
meeting, Fed officials said “strains in global financial
markets” were creating “significant downside risks.”
“Europe is the biggest, disruptive exogenous shock you
could have,” said Paul Ballew, chief economist at Nationwide
Mutual Insurance Co. in Columbus, Ohio.
Dollar Loans
Six central banks led by the Fed on Nov. 30 lowered the
cost of emergency dollar funding with a 0.5 percentage-point cut
in the premium banks pay to borrow dollars overnight. European
banks will now pay about 0.6 percent to borrow dollars from
central banks, cheaper than what US banks would pay to borrow
from the Fed’s discount window.
Most economists don’t expect the Fed to cut the so-called
discount rate that US banks pay on emergency borrowing, with
63 percent calling such a move unlikely, according to the
Bloomberg survey. The discount rate was raised to 0.75 percent
from 0.5 percent in February 2010 as financial markets improved
following the financial crisis. Twenty-two percent of economists
say the Fed will lower the rate back to 0.5 percent.
To contact the reporter on this story:
Joshua Zumbrun in Washington at
jzumbrun@bloomberg.net;
To contact the editor responsible for this story:
Christopher Wellisz at
cwellisz@bloomberg.net
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