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2010-10-28 10:48:42
By Chris Reese Chris Reese Thu Oct 28, 1:49 am ET
NEW YORK (Reuters) 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.
Including mortgage-related debt, the Fed has bought a total of $1.7 trillion in
assets to prevent the U.S. financial crisis from turning into a depression.
With the recovery still weak, policymakers have said they are ready to take
more action.
The Fed announced in August it would also buy Treasuries using funds from
maturing agency bonds and mortgage-backed securities in an effort to keep
steady its holdings of domestic securities.
Fed officials have expressed concern recently about low price inflation.
The median of forecasts from economists gave only a 15 percent chance the
world's largest economy would fall into deflation, or a sustained bout of
declining prices, by mid-2011.
(Additional reporting by Ann Saphir in Chicago and Pam Niimi and Emily Flitter
in New York: Editing by Chizu Nomiyama)