No Wall Street Consensus on When & How QE Ends
Wall Street expects the Federal Reserve to remain highly aggressive throughout 2013 but is divided over when quantitative easing will end and how it will be stopped, according to the January CNBC Fed Survey.
The 52 respondents — including economists, strategists and money managers — see the Fed on average purchasing $859 billion of assets this year for an average of $71 billion per month.
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That is slightly below the $85 billion the Fed has already announced for January, in part because about 57 percent of market participants do not expect the Fed's purchases to remain at the January level for the entire year.
About three quarters see the Fed tapering purchases en route to ending the program, with most saying tapering will begin this year. In fact, 41 percent of respondents see the Fed tapering assets by October or earlier. Three respondents forecast the Fed will end QE outright before December.
Among them is Rob Morgan of Fulcrum Securities, who believes the Fed will halt QE as soon as June 2013 and says, "There is an outside chance rates will be hiked this year as well." Morgan is more optimistic than average about the U.S. economy, forecasting 3 percent growth this year and next.
Neal Soss of Credit Suisse says an end to asset purchases this year "requires more robust job performance than we've seen to date. But continued labor market improvements, even sluggish ones, may warrant trimming the Fed's $85 billion monthly shopping budget, perhaps as soon as mid-year."
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Wall Street believes the Fed will halt asset purchases when the unemployment rate reaches 6.8 percent, an increase from last month's 6.5 percent. That could be because since the December survey the Fed provided more guidance in its monetary policy statement, pegging a 6.5 percent unemployment rate to interest rate hikes. This suggests to markets that the end of asset purchases would be somewhere above that unemployment rate.
The market also sees the Fed halting assets purchases at a 2.6 percent inflation rate, down from 3.4 percent in the prior survey.
Overall, the concept of tying monetary policy to economic targets got overwhelming support from 84 percent of respondents. But the Fed's execution came in for considerable criticism: 48 percent said the Fed could be clearer in explaining its targets and 10 percent said the Fed is not clear at all.
"Too many people think the economic targets are 'triggers' rather than 'references' and the Fed doesn't appear to be doing enough to counter this erroneous view."
"Too many people think the economic targets are 'triggers' rather than 'references' and the Fed doesn't appear to be doing enough to counter this erroneous view,'' wrote Dan Greenhaus of BTIG.
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Several respondents, like David Kotok of Cumberland Advisors, described the inflation target as "fuzzy" while saying the unemployment target is clear.
But James Paulsen of Well Capital Management was among those who complained that unemployment is "a lagging indicator." He said the Fed should use forward-looking targets such as real growth and inflation.
Joseph LaVorgna of Deutsche Bank suggested the Fed is deliberately broad "in order to maintain flexibility" for its policies. Donald Luskin of Trend Macrolytics responds, "The reality is that the Fed can change its targets at any time, so what's the point really?"
Market participants remain skeptical about the economic effects of QE: 58 percent said it won't lower the unemployment rate and half believe it will lower bond yields, while the other half says it won't.
By a 54 percent to 42 percent margin, Wall Street believes QE can lower mortgage rates and 69 percent say it can help increase stock prices.
The downside: 44 percent believe QE will cause inflation, up from 35 percent in the December survey. Thirty-six percent believe it won't cause inflation, down from 46 percent.