Fed Certain to Act in November In a Big Way: Survey
Following Friday’s disappointing jobs report, market participants are now virtually certain that the Federal Reserve will announce that it will resume buying assets at the conclusion of its November meeting and do so in a sizeable way, according to an exclusive CNBC Fed Survey.
Nearly 93 percent of the 70 respondents, including economists, fund managers and traders, believe the Fed will boost the size of its portfolio, up from 69 percent in the survey two weeks ago.
Of those who expect the Fed to move, 86 percent look for an announcement in November, up from 38 percent in the last survey.
Market participants forecast that the Fed will announce plans to purchase $500 billion in assets at the conclusion of the upcoming meeting, the first time the question has been asked.
Despite the $500 billion average, expectations for the November announcement span a range from $100 billion to as high as $1.5 trillion.
But the larger numbers are outliers, with 83 percent of respondents saying they expect the Fed to announce incremental targets for its portfolio size on a monthly or quarterly basis, rather than a single, so-called “shock and awe” strategy as it did in 2009.
In addition to a lackluster jobs report, the results follow comments from Fed Chairman Ben Bernankeand New York Fed President Bill Dudley last week widely interpreted as signaling that the Fed was likely to purchase additional assets. However, some regional Fed bank presidents have openly spoken out against the move.
- Read Full Survey Results Here
In a Friday interview on CNBC, St. Louis Fed President Jim Bullard suggested that a decision in November is more open than the market appears to believe.
“It's a tough call because we did hit a soft patch in the economy," Bullard said. "But its not so soft that its obvious that you have to do a lot right now, and so it's still possible to make the case that the economy will improve naturally on its own in 2011 and that we'll have faster growth and have inflation closer to target in 2011 without taking all these risks that come with expanding the balance sheet further.”
But Miller Tabak economist Dan Greenaus, in response to the survey, said market participants should focus on what the Fed chairman is saying.
"The current public debate among regional bank Presidents is clouding the market's view of what is ultimately most important," he said. "The Chairman has said almost explicitly the risk is doing too little, not too much and among a divided FOMC, the Chairman's views are likely to be paramount. Viewed that way, a second round of asset purchases, regardless of its complexion, seems all but assured."
CNBC launched the survey in an effort to gauge market expectations for Fed actions under what appears to be a new regime from the central bank to stimulate the economy through buying Treasurys. Before interest rates were lowered to around zero, expectations could be gauged through trading on the Fed Funds futures market.
Compared to the last survey, participants see the target for the Fed's portfolio rising a bit higher during the course of the year from its current target of $2.054 trillion.
Participants now estimate the Fed's portfolio building to $2.385 trillion by February, $2.542 trillion by August and $2.633 trillion by November 2011. The figures are 1 percent, 2.7 percent and 5.4 percent higher, respectively. So, on average, survey participants see the Fed buying a total of $633 billion in additional assets over the course or the year.
“The Fed is now burdened with being the ‘stimulator of last resort,’" said Mesirow Financial economist Diane Swonk, who looks for $1 trillion in asset purchases by November 2011. “Their tools are crude and not the best to deal with where we are, but they are all we have got.”
A little more than half of the respondents believe that the measure to increase the size of the portfoliowill be “somewhat effective” at lowering interest rates, with 38 percent saying it will be “somewhat ineffective.” The result is little changed from the prior survey and several responses indicated again that the market may already have priced in the bulk of the move interest rate move.
Comments included those who believe the Fed is “pushing on a string,” that is, further efforts to stimulate the economy will have no impact, to those who say the Fed’s efforts will continue to weaken the dollar.
Art Hogan, managing director of Jefferies, says he’s not entirely sure the purchases are necessary.
“We are in a very strange place right now between the market having priced in QEII and the economic data signaling that it may well be premature to bring on new stimulus,” Hogan wrote.
CNBC also asked about the likelihood of several alternative Fed policy measures over the next year that have been public discussed. The leading option is lowering the interest rate on excess reserves, which 37 percent see as likely, compared with 48 percent saying it’s unlikely.
Only 12 percent believe the Fed will target a specific interest rate rather than the size of the portfolio, but a surprisingly high 20 percent believe it’s likely the Fed will raise its inflation target from the current level of 2 percent, with 65 percent saying its unlikely.
When it comes to the expected size of the announcement in November, those who say their primary area of interest is equities expect the largest average purchase with an average of $607 billion. Economists, who represent the largest single group of those who replied, see a $486 billion purchase and those in the fixed income market saw the smallest at $333 billion.
But within a year, the groups reverse themselves, with fixed income respondents seeing balance sheet growth of about $837 billion, compared with those in the equity market who see total growth of $432 billion.
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