Merrill Analysts Affirm Consensus: Look For The Full $500 Billion From The Fed

The Federal Reserve today is likely to announce a $500 billion program to buy US Treasurys over the next six months, analysts from Bank of America Merrill Lynch say in a report issued this morning.


That's pretty much the consensus view, as of right now. While recent cautionary-sounding statements from Ben Bernanke and other members of the Federal Open Markets Committee has caused some speculation that the Fed might announce a smaller, incremental program, the Merrill analysts think a smaller program in unlikely.

Basically, they argue that the market is unlikely to respond well to a smaller amount and that the Fed is fully aware of this. In short, they think Fed policy is a prisoner of market expectations.

But, the Fed being the Fed, they can't rule out a smaller program entirely.

From the report:

"The financial press has speculated that the FOMC may decide to announce a more incremental purchase program — such as $100 billion or so at the November meeting, with policy re-evaluated at subsequent meetings. Such a plan is unlikely to garner the kind of market reaction the Fed is hoping for, and so seems less likely in our estimation. Still, it remains a risk scenario that we cannot ignore."

The Merrill note predicts the Fed will explicitly link easing to its inflation outlook, and deliver a statement that this latest round of policy actions will improve the financial health of the US economy overall. Harrison and Hansen believe that the Fed wants to stabilize inflation nearer to its implicit 2% objective.

The authors further believe that the policy will remain fairly open-ended, lasting longer than the market consensus currently expects.

"We expect the commitment to keep policy easy until the inflation outlook improves will be fairly general in nature, as the political and practical challenges with moving to a more formal inflation target likely preclude such an announcement in November."

In particular, the Merrill guys are predicting no tightening until the first quarter of 2013.

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