Fed seen buying up to $100 billion in assets a month

By Reuters
Posted Oct. 28, 2010 at 5:41 a.m.

Most leading economists expect the Federal Reserve to buy between $80 billion and $100 billion worth of assets per month under a new program to bolster the struggling economy, a Reuters poll found on Wednesday.

Estimates for how long the Fed will print money and how much it will eventually spend varied widely, from $250 billion to as high as $2 trillion.

In a similar Reuters poll of primary dealers conducted on October 8, dealers mostly forecast the total size of the new program at $500 billion to $1.5 trillion.

“The key question is not the size of the first step, but how far Fed officials will ultimately need to move to achieve their dual mandate of low inflation and maximum sustainable employment,” said Jan Hatzius, chief U.S. economist at Goldman Sachs in New York.

Goldman estimates the eventual size of QE2 could reach $2 trillion, at the high end of economists’ forecasts.

The economists think the impact of the asset buying could be limited given that markets have already priced in the effect of another big round of monetary stimulus.

The median of forecasts from economists at primary dealers pegs benchmark 10-year Treasury note yields at 2.65 percent as of mid-2011, just below their current level near 2.72 percent.

Lower Treasury debt yields, which are a benchmark for interest rates like those on mortgages, will be considered a key gauge of success for the new quantitative easing program from the U.S. central bank.

Seventeen of 18 primary dealers responded to the poll, with all saying they expect the U.S. central bank to announce another program of quantitative easing — dubbed QE2 — at the close of the Fed’s policy meeting on November 3.

While seven of 10 economists who replied to the question said QE2 will pull 10-year Treasury yields lower, several economists said they believed rates already had come down because of the looming prospect of more Fed purchases.

“I would argue that quantitative easing already has worked — you have seen in terrific improvement in U.S. financial conditions over the last few months including a weakening of the dollar, lower U.S. interest rates and a strengthening of stock prices,” said Zach Pandl, U.S. economist at Nomura Securities International in New York.

He added: “a lot of that has been brought about by quantitative easing and the market pricing it in to an extremely high degree.”

“The next debate is how much will U.S. growth improve because of the change in financial conditions,” Pandl said.

Benchmark yields are historically low. Earlier this month the benchmark yield dipped to 2.33 percent, the lowest since December 2008, at the height of the global credit crisis.

Quantitative easing is not an unfamiliar road for the Fed. The U.S. central bank previously bought about $300 billion of longer-term Treasury securities from March through October, 2009 as part of its efforts to combat the U.S. recession.

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