Chairman Ben S. Bernanke will probably reduce the Federal Reserve’s monthly bond buying in the fourth quarter to $50 billion from $85 billion as he begins to unwind record stimulus, economists said in a Bloomberg survey.
Policy makers must find a way to slow the pace of purchases enough to signal confidence the economy is strengthening without prompting a sudden rise in interest rates, said former Fed economists Michael Feroli and Joseph LaVorgna. They said that probably means the Fed, which concludes a policy meeting today, will follow a three-step strategy to wind down bond buying.
“There is concern the first taper would be misinterpreted as the onset of a tightening cycle” and cause interest rates to go up, said Feroli, chief U.S. economist at JPMorgan Chase & Co. (JPM) in New York. An initial reduction to $50 billion to $60 billion a month, followed by a second cut to $30 billion and then a halt to bond buying “would be enough of a runway to know and gauge the effects of what they’re doing, but not too long a runway where it’s a painfully interminable process.”
The Federal Open Market Committee (TREFQE2) plans to release a statement at 2 p.m. after a meeting in Washington. None of the 47 economists in the Bloomberg survey taken April 25-29 expects a decision at this week’s meeting to change the pace of purchases.
Withdrawing accommodation after an open-ended program of bond buying is “unprecedented territory” for the central bank, said LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. Cutting purchases by about a third would allow the Fed to gauge the reaction of the economy and investors. If the economy strengthens, the Fed could keep tapering purchases, he said. If interest rates rise and threaten growth, policy makers could renew easing.
“You want to see how the market is going to digest a cut in purchases so you want to do it in a way that minimizes the disruption,” said LaVorgna, who was among economists in the Bloomberg survey.
The Fed began purchasing $40 billion a month of mortgage- backed securities in September and announced in December additional purchases of $45 billion a month of Treasury securities.
The FOMC in a statement after its last meeting on March 20 reiterated a pledge to keep buying bonds until the labor market improves “substantially.” Bernanke said at a press conference the same day that policy makers are considering a proposal to “appropriately calibrate” bond purchases based on the performance of the economy, including the job market.