POLL-U.S. primary dealers expect Fed's bond buying over by 2014

Herbert Lash
Thursday, 19 Dec 2013 | 4:12 PM ET

* U.S. primary dealers see Fed purchases ending by late 2014

* Fed balance sheet will near $4.5 trillion by program's end

* 16 of 18 dealers see no Fed rate hike before July 2015

NEW YORK, Dec 19 (Reuters) - The Federal Reserve will wrap up its bond-buying program by the end of next year, but the U.S. central bank will not start raising interest rates until the second half of 2015, a poll of top Wall Street firms showed Thursday.

The survey canvassing 18 of the 21 primary dealers, the banks authorized to trade securities directly with the Fed, showed that Wall Street economists appear ready to take the Fed at its word after it surprised many investors with Wednesday's announcement that it would starting winding down its bond purchases next month.

At the same time, policymakers promised to keep interest rates near zero for the forseeable future.

Before Wednesday's announcement, most analysts and economists polled by Reuters had expected the Fed to wait until March before starting to reduce, or "taper" purchases of $85 billion a month in U.S. Treasury and agency mortgage-backed securities.

But with the wind-down set to get started next month, primary dealers now expect the program to be wrapped up somewhere between next September and December.

"We think they're done in a year, so the last taper will be in December 2014," said Yelena Shulyatyeva, U.S. economist at BNP Paribas in New York.

Five economists believe the Fed's bond-buying will end in September 2014, while six others see the end date in October, the survey showed. Seven other economists pegged the end of "quantitative easing" either in November, December, or at some time in the fourth quarter.

By the time the end is reached, the Fed's balance sheet will total about $4.5 trillion, roughly $500 billion more than its approximate size now, according to the survey's median estimate.

The Fed has gone to lengths to emphasize that in its view tapering is not tightening, meaning the end of bond purchases does not mean imminent interest rate increases, and most primary dealers agree, the poll showed.

Just two primary dealers predict the Fed will lift the Federal Funds Target Rate, its key overnight interest rate, before July 2015, with both targeting the second quarter. The rest of those surveyed see it later in the year or even in 2016.

Nine economists forecast the Fed will begin to raise rates in the second half of 2015, with three saying the third quarter and five pegging the fourth quarter. One indicated the second-half of the year and one said it could be either late 2015 or early 2016.

Six economists in the survey said they expect the Fed to wait until 2016 before raising the target rate, an even more dovish view than Fed policymakers' own expectations for their first move on rates.

According to projections released Wednesday by the Fed along with its policy statement, 12 of the 17 members of the policy-setting Federal Open Market Committee said the appropriate time for raising rates would be in 2015, with just three saying 2016. Two Fed policymakers, however, pegged next year as the right time to raise rates.

A primary dealer poll taken on Dec. 6 after the release of monthly U.S. payrolls figures showed respondents estimated the Fed's first rate hike would occur sometime between the first quarter of 2015 and the third quarter of 2016.

(Additional reporting by Ellen Freilich, Rodrigo Campos, Steven Norton, Edward Krudy and Jonathan Spicer in New York and Leah Schnurr in Toronto; Writing by Herb Lash; Editing by Dan Burns and David Gregorio)