Wall Street is looking for the Federal Reserve to buy a total of $1.25 trillion of assets under its latest debt purchase program intended to stimulate the economy, according to a Reuters poll conducted on Friday. The median of forecasts from economists at 15 US primary dealers - the large financial institutions that deal directly with the Fed - was for the central bank to buy $1.25 trillion of assets, which was up from a median of $1 trillion in a similar poll conducted on March 8.
The forecasts for the size of Fed purchases in the latest round of stimulus mostly ranged from $885 billion to $1.6 trillion. The Fed bought a total of $2.3 trillion in mortgage and government debt in two prior rounds of quantitative easing in the wake of the financial crisis that hit in 2007.
Eleven of the 15 dealers expect the Fed to continue the latest stimulus program, known as QE3, into 2014, while four expect the Fed to end the program late this year. In the March poll, nine of 15 dealers said the Fed would continue asset purchases into 2014. All 15 of the primary dealers said the Fed would taper the size of its asset purchases before terminating them. Currently, the Fed is buying $85 billion per month of mortgage-backed securities and Treasuries and has said the duration of the purchase program is open-ended.
Earlier in the week, at the conclusion of a two-day policy meeting, the Fed said it will increase or decrease the pace of its purchases as the outlook changes for the labour market and inflation. While all of the primary dealer economists who responded to the poll said they eventually expect the Fed to reduce the size of its monthly buying, several said it would take some very noticeable slowing in economic growth to spur the central bank to move to increase the size of purchases.
"The bar for expanding is high," said Julia Coronado, chief North American economist at BNP Paribas in New York. "To do more, the economy would really have to be in a dire situation." The Fed reiterated this week that it intends to hold interest rates at the current ultra-low level near zero, while the unemployment rate remains above 6.5 percent, as long inflation expectations do not flare up.
Of the 15 primary dealers who answered the poll, nine expect US unemployment to dip to the Fed's target of 6.5 percent in 2015, while six expect it to reach that level in 2014. In the March poll, 13 expected unemployment to dip to that level in 2015, while two said that level would be reached in the fourth quarter of 2014. The poll was conducted on Friday after the government released data showing US employers added a larger-than-expected 165,000 workers to their payrolls in April and the jobless rate fell to the lowest since December 2008 at 7.5 percent.
While the payrolls data showed more jobs were added than expected and included upward revisions to the previous two months of payrolls additions, they likely had little impact on expectations for Fed policy, said Tom Simons, an economist at Jefferies & Co in New York.
"The Fed will want to see a sustained improvement in the outlook for the labour market before making adjustments to policy," Simons said. "Given the significant volatility in recent months, we highly doubt that the Fed will be quick to adjust their outlook. "Also, the recent decline in the inflation data suggests that the Fed will continue to be accommodative even as the labour market continues to heal," he added. There are 21 US primary dealers and not all of them responded to the Reuters poll.
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