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Fed Has Aided Stocks, Not Rates or Jobs: CNBC Survey

The Federal Reserve’s policy to purchase $600 billion of bonds in a program widely known as QE2 has been mostly ineffective at lowering interest rates and will do little to improve the unemployment rate, according to the exclusive CNBC Fed Survey in December.

Federal Reserve Bank Chairman Ben Bernanke
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Federal Reserve Bank Chairman Ben Bernanke

The survey of 76 economists, bond and stock traders, and analysts, found 63 percent saying the Fed’s program has been ineffective at lowering interest rates.

A similar percentage believes the program will not help lower the unemployment rate.

“I see QE2 as mainly pushing on a string,” wrote Scott Wren, senior equity strategist at Wells Fargo Advisors.

But respondents to the survey say the Fed program has played an important part in raising stock and commodity prices.

In fact, nearly three-quarters of the group say the Fed’s bond purchase program has helped raise stock prices, while 63 percent see it as a reason why commodity prices are higher.

As a result, some see QE2 as a success for pushing up inflation expectations and the stock market. “Those that say the asset-purchase program is a failure are too narrowly focused on the yield on the 10-year Treasury note,’’ wrote Tony Crescenzi, senior vice-president, strategist, portfolio manager of Pimco.

“A substantial effect of the asset-purchase program is that it has led investors to believe that short-term rates will be kept low for an extended extended period. This compels investors to take risk, buoying risk assets,” said Crescenzi.

The Federal Reserve has been the subject of strong criticism since launching its QE2 program in November. Fed Chairman Ben Bernanke suggested it was a way to lower interest rates and unemployment.

Since November, however, yields on treasuries have risen by nearly a percentage point.

Asked the reason for the increase in yields, 61 percent of the survey respondents said the main reason was a stronger growth outlook. Their next choice was a worsening outlook for the deficit, likely the result of the recent tax compromise in Washington, followed by a rise in the inflation forecast.

"The economy is strengthening and the extension of the Bush tax cuts for all taxpayers is playing a more important role in boosting growth expectations than QE2 is," says RDQ Economics chief economist John Ryding.

Overall, 72 percent believe the Fed will follow through and purchase the entire $600 billion of Treasuries announced in November. Twenty percent believe the Fed will do less than that amount, and 8 percent think the Fed will do more.

“I doubt the Fed will complete all $600 billion,’’ wrote Chris Rupkey, chief economist at Bank of Tokyo Mitsubishi. “I think they pull the plug on this at April 26-27 meeting, as the outlook will have changed. And if they don't do it, Ron Paul will.”

As for QE3, 41 percent of market participants think there is a chance the Fed will continue to increase the size of its portfolio after June 2011. On average, those who believe in QE3 look for the Fed to add an additional $340 billion in purchases.

But Mark Zandi, Chief Economist at Moody's Analytics , disagrees, saying, "The passage of the tax cut deal significantly improves the economy's prospects in 2011 and reduces the need for any additional QE."

Add it all up, and 42 percent of survey participants give Fed Chairman Ben Bernanke a "B" grade and 26 percent give him an "A," including Mark Vitner, managing director and senior economist at Wells Fargo.

He says, "Bernanke gets a high grade because he is making the best of the lousy policy options that are available to him. He also gets points for having the bravery to go where no Fed chairman has gone before."

Still, almost a third of the group gives Bernanke a "C" or lower. Nearly two-thirds say the Fed has communicated its reasons for QE2 clearly.

Jodi Gralnick contributed to this story.

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