Institute for Economic Competitiveness

Nationally Recognized, Locally Focused.

By: Paul A Ebeling Jr.

Original Link: Live Trading News, US 2.22.13

February 22, 2013

No End in Sight to Loose US Fed Policies

A new survey of top economists shows the majority believe the US Federal Reserve will continue its bond-buying spree through the end of Y 2013 in its lengthening effort to spur economic growth.

USA Today polled 46 economists to get their take on the Fed’s current program.

Twenty-seven forecasted the Fed will keep buying long-term Treasury bonds until after 1 January 2014, and 26 said the Fed will likewise keep buying mortgage-backed securities MBS past that date.

“I think the economy is sufficiently sluggish that [the Fed] can continue these purchases,” said Sean Snaith, director of the University of Central Florida’s Institute of Economic Competitiveness.

The Fed is trying to boost bond prices and lower yields with its purchases of $45-B in Treasuries and $40-B of MBS each month. The Fed has said it would continue the purchases until it sees a substantial improvement in the labor market outlook.

The strategy is intended to lower interest rates to drive purchases of homes, cars and factory gear, even as it forces investors into stocks and riskier assets, according to the report in USA Today.

The minutes from the Fed’s December meeting showed some members want the bond buying to stop by year’s end, while others want it to end earlier.

Some members say that since the Fed’s bond portfolio is now more than $3-T, they fear it could make it hard to sell them quickly enough to head off eventual inflation, the paper reported.

Kansas City Fed Chief Esther George was the lone dissenter to the bond purchases at the January meeting.

Atlanta Fed President Dennis Lockhart, considered a centrist on the central bank’s board, he believes the Fed must keep buying bonds until the end of the year because of the weak labor market.

“I do believe that we are not going to see enough improvement in the very short term to claim victory on the substantial improvement idea,” he noted. “Therefore my recommendation would be to continue through the end of the second half” of the year.

Mr. Lockhart said the biggest threat to growth continues to be budget battles and attendant uncertainty in Washington. On 1 March, $85-B in automatic government spending cuts are set to take effect and a temporary bill funding the government expires in late March.

“There are simply a lot of hurdles in this race that we have to get over. Some combination of gridlock could really undermine confidence that seems to be building at the moment,” he said.

| More