US Fed set to launch fresh bond buying to help economy

Dec 05 2012, 13:54 IST
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Many economists think the U.S. central bank will announce monthly bond purchases of $45 billion. (Reuters) Many economists think the U.S. central bank will announce monthly bond purchases of $45 billion. (Reuters)
SummaryMany economists think the U.S. central bank will announce monthly bond purchases of $45 billion.

The Federal Reserve is set to announce a fresh round of Treasury bond purchases when it meets next week, avoiding monetary policy tightening to maintain support for the weak U.S. economy amid uncertainty over the looming year-end "fiscal cliff." Many economists think the U.S. central bank will announce monthly bond purchases of $45 billion after its policy gathering on Dec. 11-12, signaling it will continue to pump money into the

US economy during 2013 in a bid to bring down unemployment. "We expect status quo," said Laurence Meyer of the forecasting firm Macroeconomic Advisers. "We expect purchases will continue at the same monthly rate as over the last three months; that the composition will be the same, and that the maturities distribution will be the same." The decision would cement expectations that the Fed will keep buying a combined $85 billion of Treasuries and mortgage-backed bonds a month, while repeating that it expects to hold interest rates near zero until at least mid-2015. The Fed could even decide to announce a larger level of

purchases if it wanted to exceed expectations and give the market a bigger jolt to press borrowing costs lower. "If the market expects $45 billion, maybe they should deliver $60 billion ... get markets more excited and really push rates down," said Torsten Slok with Deutsche Bank in New York. U.S. unemployment remains high at 7.9 percent and the economy, while doing better than Europe's, is expected to grow at a meager rate of only around 2 percent next year.

OPERATION TWIST

The fresh bond purchases will replace a program called Operation Twist, which expires at the end of the year. Under Twist, the Fed bought $45 billion of longer-dated bonds a month with the proceeds from the sale of its shorter-date holdings. Fresh outright purchases would therefore create new money, whereas no new action by the Fed would amount to a tightening in monetary policy as Twist came to an end. Add in monthly $40 billion mortgage-backed bond purchases

which it began in September, this would boost the Fed's balance sheet by $1.2 trillion, to $4 trillion, by end-2013 if it keeps buying assets at this pace, as economists expect.

"I think it is going to be (maintained) into 2014 because they are not looking for much improvement in the unemployment rate over 2013," said Stephen Oliner, a resident scholar at the

American Enterprise Institute. The Fed has promised to maintain its

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