Analyst view: What economists are saying about Fed’s QE2

WASHINGTON (BestGrowthStock) – The U.S. Federal Reserve is expected to resume a program of large-scale asset purchases to try to revive a faltering economic recovery.

KEY POINTS:

— The Fed will issue a statement on Wednesday around 2:15 p.m. following a two-day meeting of its Federal Market Open Market Committee, which sets policy.

— Analysts widely expect the Fed to resume purchases of longer-term Treasuries. They generally project purchases of around $500 billion over about 6 months.

— The Fed cut its main policy rate to near zero in December 2008 and later eased again by buying $1.7 trillion in assets.

— Fed Chairman Ben Bernanke has said long-term asset purchases are an effective way to lower borrowing costs when rates are near zero, but a program of this size and scope is untested and many worry further expansion of the Fed’s balance sheet sets the stage for inflation or another asset bubble.

— THE FED’S TOUGH DECISION

COMMENTARY:

MICHAEL DARDA, CHIEF ECONOMIST, MKM PARTNERS, STAMFORD,

CONNECTICUT

“The Fed … believes that the large volume of ‘slack’ in the economy has created downside risks to its inflation forecasts … Although most economists believe the linkage between slack and inflation is sound and unimpeachable, history suggests this may not be the case. Moreover, if real rates on risk-free cash assets remain below current and expected inflation for the foreseeable future, it makes sense to remain weighted toward risk assets that offer some inflation protection.”

JULIA CORONADO, ECONOMIST, BNP PARIBAS, NEW YORK

“Our baseline expectation is the same as the consensus and we don’t think it will be a disappointment, nor a non-event in part because it will be accompanied by some fairly strong language that will 1) commit to holding the portfolio for an extended period and 2) that the program will be open ended and subject to the expansion until the Fed is confident of achieving what Chairman Bernanke called the ‘mandate-consistent inflation rate’ of ‘about 2 percent’ on core inflation … There is considerable debate about the benefits to the economy of QE2. However, I think that while it does not lead to a lot of job creation in the near term, it will certainly have a positive impact over time through higher asset prices and more stable balance sheets, a modest but positive impact from lower rates, and greater confidence that the Fed is insuring the downside tail risk to the economy which will in turn spur greater hiring and investment than would otherwise occur. Such effects help buy time as the economy works through the deleveraging cycle.”

ECONOMISTS AT DEUTSCHE BANK IN RESEARCH NOTE, NEW YORK

“We expect policymakers to take a gradualist, flexible approach to QE2; in turn, the Fed will likely not commit to a total amount of asset purchases but rather provide a maximum amount of Treasury buying the Fed will undertake between FOMC meetings. With the Fed meeting eight times per year, we envision the committee stating its intention to purchase up to $125 billion of Treasuries on an inter-meeting basis, with policymakers then reviewing those purchases at the ensuing meeting. This means we could see $1 trillion of additional Treasury purchases per annum in addition to the roughly $400 billion in maturing MBS that will be replaced by Treasuries. Further purchases beyond the ensuing FOMC meeting will be contingent on the evolution of the economic data and the behavior of financial markets.”

L. DOUGLAS LEE, PRESIDENT, ECONOMICS FROM WASHINGTON:

“While the Fed itself does not know just how much quantitative ease will be required or how long the program will be in effect, we expect enough guidance for markets to form firm views on the stance of monetary policy for a sustained period.”

ASHA BANGALORE, ECONOMIST, NORTHERN TRUST, CHICAGO:

“The advocates of QE2 expect a positive impact from lower interest rates lifting all interest sensitive areas of expenditures such as home purchases, refinancing of mortgages, and increased business expenditures, at the margin. In addition, bankers should be induced to lend given the alternatives of paltry earnings from excess reserves and Treasury securities. Also, the benefit of increased exports from a depreciation of the dollar should be seen in headline GDP. The current projected pace of economic growth is inadequate to lift payrolls and lower the unemployment rate. Therefore, from the FOMC’s standpoint, QE2 is the least costly policy option to shake off the sluggish economic conditions in place.”

HIDEO KUMANO, CHIEF ECONOMIST, DAI-ICHI LIFE RESEARCH

INSTITUTE, TOKYO:

“The Fed may keep its initial bond buying amount small but will probably ensure markets that it will keep buying debt consistently. Its asset purchases will likely come in several stages, which I think is the most effective way of influencing bond yields.

“Even if the Fed’s purchase amount is modest, I’m not sure whether the dollar/yen will reverse its downtrend. There’s a good chance the dollar will fall below 80 yen after the Fed’s move That’s when Japan will seriously ponder whether to intervene in the currency market.”

Analyst view: What economists are saying about Fed’s QE2