Fed May Revise Zero-Rate Vow as Bond-Buying Need Fades

The Federal Reserve will probably revise its pledge to keep interest rates close to zero through mid-2013 as the need for large scale asset purchases diminishes, according to economists in a Bloomberg News survey.

The Fed will alter the interest rate commitment before June, according to 64 percent of economists surveyed, with 51 percent saying the central bank will abandon the option of a third round of buying bonds, or so-called QE3.

Chairman Ben S. Bernanke and his policy-making colleagues plan to meet today to discuss the outlook for an economy that has strengthened since their November meeting, lowering the jobless rate to 8.6 percent from 9.1 percent. Altering the low- rate commitment would give central bankers the flexibility to adjust monetary policy without resorting to a third round of large-scale bond purchases, also known as quantitative easing.
“The base case is that QE3 probably will not unfold,” said Sam Bullard, senior economist at Wells Fargo Securities in Charlotte, North Carolina. “We’ve got some momentum here. The data that’s been coming in has been stronger than expected and prior months’ data have been revised up.”
Before the Fed’s November gathering, 69 percent of economists in a Bloomberg News survey said they believed the Fed would begin more purchases, as did 16 of the 21 primary dealers of U.S. government securities in a survey last month.
The Federal Open Market Committee is set to release a statement at around 2:15 p.m. Washington time, following its last scheduled meeting of the year.

Target Rate

The Fed reduced its target interest rate to a range of zero to 0.25 percent in December 2008. In August the FOMC said economic conditions would probably warrant leaving rates near zero through at least mid-2013, replacing an earlier pledge to keep them there for a “considerable period.”
The central bank purchased $2.3 trillion of bonds in two rounds from December 2008 to June 2011. In September it announced it would buy $400 billion of longer-term government securities and sell $400 billion of short-term debt in order to lengthen the average maturity of securities on its balance sheet.
The yield on the 10-year Treasury fell to a record low 1.72 percent on Sept. 22, the day after the central bank announced the maturity-lengthening program known as Operation Twist. The yield was 2.01 percent late yesterday in New York.
A plurality of 44 percent of economists expect the central bank to wait until their Jan. 25-26 meeting to revise their pledge to hold interest rates near zero through mid-2013. Fifty- one percent say the central bank will use that meeting to unveil a “broader overhaul” of their strategy for communicating with the public about policy, including the path of interest rates.


http://www.bloomberg.com/news/2011-12-13/fed-seen-revising-zero-rate-pledge-as-need-for-bond-purchases-diminishes.html

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