US Fed officials suggest possible end to asset purchases in 2013

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SAN DIEGO: The Federal Reserve could halt its asset purchases this year, two top Fed officials suggested on Friday, a view also gaining traction among economists at Wall Street's top financial institutions.

St. Louis Fed President James Bullard, a voting member of the Fed's monetary policy panel in 2013, said a drop in the unemployment rate to 7.1 percent would probably constitute the "substantial improvement" in the labor market that the central bank seeks.

That's the bar for the Fed's policy-setting committee to halt the current round of asset purchases that it began in September. The Fed is currently buying $40 billion in mortgage-backed securities and $45 billion in Treasuries each month in a bid to push down borrowing costs and spark faster growth.

"If we get even moderately good growth this year I would expect unemployment to continue to tick down," Bullard later told reporters. "I would say that that would put the committee in a good position to think about doing a pause with the balance sheet policy."

Bullard also acknowledged that he had a more optimistic view on unemployment than some other Fed officials, and sees it in the "low 7's" by year-end.

Thousands of economists have gathered in San Diego for the annual American Economic Association meeting, drawing some of the biggest names in the profession as well as top policymakers.

Bullard stressed that the Fed would decide about changing its bond-buying program on the basis of the outlook for the labor market, and said that if it decided to pause, and then saw conditions weaken, it might resume the purchases.

The Fed has also promised to keep interest rates at their current near-zero level until unemployment drops to 6.5 percent, as long as inflation does not threaten to rise above 2.5 percent.

Philadelphia Fed Bank President Charles Plosser, who spoke separately at the conference, said he expects unemployment to drop to between 6.8 percent and 7.0 percent by the end of 2013.

As a result, he hopes the Fed will stop buying bonds before the 6.5 percent threshold, implying he anticipates the asset purchases could halt this year. Unemployment registered 7.8 percent last month.

Economists at nine of 16 primary dealers -- the large financial institutions that do business directly with the Fed -- told Reuters on Friday they expect the Fed to end its Treasuries purchases in 2013.

Fed policymakers are increasingly concerned about the impact of their monthly purchases, which currently total $85 billion.

Minutes from their December policy meeting showed that "several" top officials expected to slow or stop the so-called quantitative easing program, dubbed QE3, "well before" the end of the year - news that surprised some on Wall Street and prompted a drop in stocks and bonds, and a rise in the dollar.


Meanwhile, another top Fed official warned the U.S. central bank's aggressive easing plan threatens the Fed's credibility.

Jeffrey Lacker, president of the Richmond Fed, on Friday held his ground opposing QE3, arguing that continued monetary policy is not the appropriate way to tackle the problem.

"It is unlikely that the Federal Reserve can push real growth rates materially higher than they otherwise would be, on a sustained basis," Lacker, who dissented on all Fed easing moves last year, told a meeting of the Maryland Bankers Association.

The U.S. economy expanded 3.1 percent in the third quarter on an annualized basis, but growth is believed to have slowed sharply to barely above 1.0 percent in the last three months of the year.

"I see an increased risk, given the course the committee has set, that inflation pressures emerge and are not thwarted in a timely way," he said.

Bullard, speaking on a panel in San Diego, warned that central bankers, in fighting to stabilize financial markets, have sacrificed some of their cherished independence, an attribute many Fed historians and policymakers argue is key to keeping inflation under control.

Bullard singled out the European Central Bank as one of the worst offenders, but warned more broadly about the "creeping politicization" of central banking globally -- something that he said would deliver disappointing economic results.


While Lacker and Plosser are outspoken policy hawks, Bullard is more of a centrist who is nonetheless toward the hawkish end of the spectrum of Fed officials. The three were the first top central bank officials to speak publicly since the minutes were unveiled on Thursday.

After the December meeting, the Fed said it would continue buying bonds until the labor market outlook improves "substantially," which Fed Chairman Ben Bernanke has characterized as a "sustained" decline in the unemployment rate.

Government data released on Friday showed the U.S. jobless rate held steady from November to December. Bullard called the December jobs number - a boost of 155,000 in new non-farm jobs - "reasonably good.

Fed Vice Chair Janet Yellen, a proponent of aggressive Fed easing, also spoke at the conference on Friday, but confined her comments to how regulators are tackling risks to financial stability. - Reuters

Poll: Wall Street economists see Fed's Treasury buying ending in 2013

NEW YORK: Most economists at Wall Street's top financial institutions expect the Federal Reserve in 2013 to end the program with which it bought Treasury debt in an effort to stimulate the economy, according to a Reuters poll on Friday.

Economists at nine of 16 primary dealers -- the large financial institutions that do business directly with the Fed -- said they expect the current Fed program of buying $45 billion per month of Treasuries to end in 2013.

Of the nine, eight said the central bank would quit the program in the fourth quarter or the end of the year. One forecast the end of the program in June.

Six of 15 economists at primary dealers said the Treasury purchase program would close in 2014, while one said it would continue through to the first half of 2016.

Minutes from the Fed's December policy meeting, released on Thursday, showed "several" top officials expected to slow or stop the so-called quantitative easing program "well before" the end of the year. That news surprised some on Wall Street and prompted a drop in stocks and bonds, and a rise in the dollar.

"It is hard to be as confident of the purchases continuing at the same pace, because we had originally thought they were going to last through the fourth quarter of 2014, but now it is not as clear that is going to be the case," said Tom Simons, money market economist with Jefferies & Co. in New York.

St. Louis Fed President James Bullard, a voting member of the Fed's monetary policy panel this year, said on Friday the Fed could be in a position to halt its asset purchases this year if the U.S. economy improves.

The Fed this week began buying longer-dated Treasuries in an open-ended stimulus program that replaced its "Operation Twist" stimulus, under which it was selling shorter-dated

Treasuries and using the proceeds to buy longer-dated U.S. government debt. Twist expired at the end of December, with analysts noting the central bank had few shorter-dated Treasuries left to sell.

The central bank is already buying about $40 billion per month of mortgage-backed securities in an effort to prop up the economy.

The median of forecasts from 13 primary dealers was for the Fed to buy a total of $540 billion of Treasuries under the current stimulus program. Estimates ranged from $270 billion to $1 trillion.

Nine of 16 primary dealers said the U.S. unemployment rate would fall to 6.5 percent in 2015, while six said it would dip to that level in 2014 and one said it would happen in 2016.

The Fed at the conclusion of its December policy meeting said it expects to hold interest rates at the current level of zero to 0.25 percent at least as long as the unemployment rate remains above 6.5 percent and inflation between one and two years ahead is projected to be no more than 2.5 percent.

Previously, the Fed had said it expects to hold rates near zero at least through mid-2015.

The Reuters poll was conducted on Friday after the government reported the pace of hiring by U.S. employers eased slightly in December, while the unemployment rate held steady from November at 7.8 percent.

"In the context of the Fed's now explicit unemployment rate target, (Friday's payrolls data) at the margin theoretically extends the timing of the first tightening," said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York.

"That said, at the current six month pace in monthly payroll gains and labor force growth, the unemployment rate would still hit 6.5 percent by June 2014 - much sooner than the Fed's prior mid-2015 launch point," he said.

There are 21 U.S. primary dealers. Not all of the dealers responded to the Reuters poll.

Courtesy: The Star

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