Fed May Strengthen Stimulus Pledge on Renewed Recession Concern
U.S. Federal Reserve chairman Ben S. Bernanke. Photographer: Andrew Harrer/Bloomberg
Aug. 9 (Bloomberg) -- Marvin Goodfriend, a professor of economics at Carnegie Mellon University, discusses the outlook for Federal Reserve policy and prospects for further quantitative easing. Goodfriend speaks with Tom Keene on Bloomberg Television's "Surveillance Midday." (Source: Bloomberg)
Aug. 9 (Bloomberg) -- Jack Malvey, chief global markets strategist at Bank of New York Mellon Corp., talks about Federal Reserve policy and the U.S. stock and bond markets. He speaks with Betty Liu and Erik Schatzker on Bloomberg Television's "In the Loop." (Source: Bloomberg)
Aug. 9 (Bloomberg) -- Dean Maki, chief U.S. economist at Barclays Capital, talks about the outlook for today's policy statement by the Federal Reserve's policy-setting Federal Open Market Committee. He speaks with Lisa Murphy and Adam Johnson on Bloomberg Television's "InBusiness With Margaret Brennan." (Source: Bloomberg)
Aug. 9 (Bloomberg) -- Jonathan Golub, chief U.S. market strategist at UBS Securities, talks about the U.S. economy, stock market and investor sentiment. Golub, speaking with Erik Schatzker, Sara Eisen, Betty Liu and Michael McKee on Bloomberg Television's "InsideTrack," also discusses Standard & Poor's decision to downgrade U.S. debt rating from AAA to AA+. (Source: Bloomberg)
Aug. 9 (Bloomberg) -- Joseph Balestrino, a fixed-income market strategist at Federated Investors Inc., talks about today's Federal Open Market Committee meeting and its potential impact on the financial markets. Balestrino speaks with Betty Liu on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
Aug. 9 (Bloomberg) -- Jim O'Neill, chairman of Goldman Sachs Asset Management, discussess the outlook for Federal Reserve monetary policy. The Fed's policy-setting Federal Open Market Committee meets today in Washington. O'Neill speaks from Dorset, England, with Owen Thomas on Bloomberg Television's "On the Move." (Source: Bloomberg)
Aug. 9 (Bloomberg) -- Harvard University's Kenneth Rogoff talks about Standard & Poor's decision to downgrade U.S. debt and its implications for the nation's economy and central bank monetary policy. Rogoff also discusses the outlook for the global financial markets, China's economy and European Central Bank monetary policy. He speaks from Boston with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)
Aug. 9 (Bloomberg) -- Peter Lewis, head of Asian equities and equity derivatives at MF Global Hong Kong Ltd., talks about the global rout in equities and the outlook for economies. Lewis also discusses Federal Reserve monetary policy. He speaks with Rishaad Salamat on Bloomberg Television's "Asia Edge." (Source: Bloomberg)
Aug. 9 (Bloomberg) -- Benjamin Pedley, head of investment strategy for North Asia at HSBC Private Bank, talks about China's economy and central bank monetary policy. China’s inflation accelerated to the fastest pace in three years in July, limiting the scope for monetary easing as risks to the global economy mount. Pedley also discusses the global economy, financial markets, and Federal Reserve monetary policy. He speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia (Source: Bloomberg)
Shoppers leave a Circuit City outlet running a store closing sale in Greensboro, North Carolina, U.S. Photographer: Jim R. Bounds/Bloomberg
The Federal Reserve Board building stands in Washington, D.C., U.S.. Photographer: Joshua Roberts/Bloomberg
The U.S. Federal Reserve building stands in Washington, D.C. Photographer: Andrew Harrer/Bloomberg
Federal Reserve officials may strengthen their commitment to record monetary stimulus as soon as today after a faltering economic recovery and a U.S. credit- rating cut provoked a rout in global stocks.
By a 52 percent to 48 percent margin, respondents in a Bloomberg News survey said the Fed would ease policy this year through monetary tools or statement language. If the central bank acts, 59 percent said it would communicate that the federal funds rate, balance sheet or both will remain especially stimulative for a longer period or more specific amount of time.
Chairman Ben S. Bernanke and his colleagues are weighing the use of more untested policy tools after two rounds of bond buying totaling $2.3 trillion failed to spur sufficient economic growth and reduce unemployment below 9 percent. The Federal Open Market Committee holds its regular meeting today in Washington following the worst day for U.S. stocks since December 2008.
“The odds of more dramatic action are higher,” said Vincent Reinhart, a former chief monetary policy strategist at the Fed. “However, they might not want to be seen as responding so directly to equity prices,” Reinhart said, adding that policy makers may wait to signal a new round of bond purchases until Bernanke gives a speech on Aug. 26 at a Fed conference at Jackson Hole, Wyoming. Reinhart is a resident scholar at the American Enterprise Institute in Washington.
Stay at Record
The FOMC began its meeting around 8 a.m. in Washington and plans to issue a statement at about 2:15 p.m. Julia Coronado, chief economist for North America for BNP Paribas in New York, said the central bank may say today the economic slowdown is persisting longer than expected. Policy makers may also say the Fed’s securities portfolio will remain at a record for an “extended period” and replace shorter-term securities with longer maturities to reduce rates on longer-term debt, she said.
The Fed reiterated in June that the overnight interbank lending rate would be “exceptionally low” for an “extended period” and said the policy of reinvesting maturing securities to keep the balance sheet steady would be maintained, without saying how long.
The “extended period” phrase means that the FOMC is at least two or three meetings away, or “significantly longer,” from taking any action, Bernanke said at a June press conference.
Bernanke isn’t scheduled to hold a press briefing today, unlike after the June 21-22 policy meeting. He holds news conferences only after two-day meetings, when the Fed releases updated economic forecasts. Forecasts are next scheduled for release after the Nov. 1-2 gathering. On such days, the Fed releases its announcement at around 12:30 p.m.
Debt Crisis
The drop in global stocks, further fueled by concerns over Europe’s debt crisis, adds to pressure on the Fed, which is confronting a slowing U.S. economy and unemployment stuck above 9 percent.
The Standard & Poor’s 500 Index tumbled 6.7 percent yesterday to 1,119.46 in New York trading, its biggest decline since December 2008.
The Financial Stability Oversight Council, which is chaired by Treasury Secretary Timothy F. Geithner and also includes Bernanke, convened by teleconference yesterday afternoon, according to a government official who declined to be named because he wasn’t authorized to discuss the matter.
Staying in Touch
The council discussed market developments in light of increased volatility and risk aversion, the official said. Each member gave an update on market functioning and details on sectors they oversee. Council members, who also include the chairmen of the Securities and Exchange Commission and the Federal Deposit Insurance Corporation, agreed to stay in close communication in the coming days, according to the official.
Today, U.S. stock index futures rose, European shares pared losses and Treasuries fell.
Standard & Poor’s 500 Index futures added 1.5 percent at 8:41 a.m. in New York, after losing as much as 3.2 percent. The Stoxx Europe 600 Index was down 0.4 percent after falling as much as 5.1 percent. Treasuries, the benchmarks for the $34 trillion U.S. debt market that is more than twice the value of American equities, fell. The 10-year note yield was up seven basis points at 2.39 percent.
Asked which step the Fed would most likely take first, 59 percent of 51 respondents said the central bank would alter language in the FOMC statement.
Deposits on Reserves
Another 22 percent said the Fed would increase the average maturity of its securities holdings, 18 percent said it would buy more assets and 12 percent see the Fed lowering the 0.25 percent interest rate paid on banks’ excess reserve deposits. The total exceeds 100 percent because some economists said the first step would involve two actions.
Economists were divided on whether the Fed would act now, with 35 percent of 46 respondents saying the easing step would come today and 39 percent predicting a move at the next meeting Sept. 20. Fifteen percent saw a potential decision at the Nov. 1-2 meeting, and the remaining 11 percent said sometime after the Dec. 13 session.
The Fed is likely to start a third round of asset purchases, and “they certainly should do something right away,” said Kenneth Rogoff, a Harvard University economics professor and former Fed researcher who attended graduate school with Bernanke. It’s not clear if Bernanke would have the support of the Federal Open Market Committee, Rogoff said.
‘More Decisively’
“It’s going to move more decisively” than in the first two rounds, Rogoff said in an interview with Bloomberg Television. He recommended the Fed say it’s trying to create “moderate inflation” and avoid repeating that officials are trying to boost stocks.
The survey of 58 economists was conducted Aug. 5-8 by e- mail and completed at around noon yesterday. Given the opportunity to change answers after S&P cut the U.S.’s AAA credit rating on Aug. 5, one respondent altered a forecast.
The Fed’s meeting comes two days after central bankers and finance ministers from the Group of Seven nations pledged to “take all necessary measures to support financial stability and growth.” The officials said they would pump money into the global economy and take other steps if warranted.
The G-7 statement followed a pledge by the European Central Bank to “actively implement” its bond-purchase program. The ECB started buying Italian and Spanish assets yesterday in its riskiest attempt yet to tame the continent’s sovereign debt crisis.
Third Round
While Fed officials may weigh whether to undertake a third round of government bond purchases to spur growth, they probably won’t announce a new program today, respondents said. In fact, a majority of economists said in the Bloomberg survey that a third round of quantitative easing won’t happen.
Forty-two percent of 52 respondents said more bond purchases are very unlikely, and 29 percent see them as somewhat unlikely. Of the 29 percent who see such a move as likely, 13 percent say the probability is more than 75 percent, and 15 percent say the chance is 50 percent to 75 percent. In Bloomberg’s June survey, 7 percent of analysts said a third round of bond buying, or QE3, was likely.
Such a step may backfire because it could panic investors by signaling the economy is in worse shape than the Fed thought, said Lynn Reaser, chief economist at Point Loma Nazarene University in San Diego, California, and a board member of the National Association for Business Economics.
Bond Purchases
The Fed in June completed a $600 billion Treasury bond- purchase program aimed at reducing long-term borrowing costs on everything from car loans to mortgages and boosting share prices.
Even with the purchases, the economy grew in the first six months of this year at the weakest pace since the recovery started in 2009. After almost stalling at a 0.4 percent annual pace in the first three months of this year, the economy expanded at a 1.3 percent rate last quarter, the government reported on July 29.
“I’m sure they’re facing a tough decision here about what steps they should take,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida. “These things are kind of marginal at this point, but every little bit would help.”
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