Fed’s ‘Extended’ Pledge May End in 2011, Economists Say

Ben S. Bernanke, chairman of the U.S. Federal Reserve. Photographer: Andrew Harrer/Bloomberg

April 26 (Bloomberg) -- Michael Purves, chief market strategist at BGC Financial LP, and Steven Blitz, a senior economist at ITG Investment Research Inc., talk about the U.S. economy and Federal Reserve policy. They speak with Pimm Fox on Bloomberg Television's "Taking Stock." (Source: Bloomberg)

Federal Reserve officials will probably prepare to pull back from record stimulus by dropping a pledge this year to hold the main interest rate near zero for an “extended period,” according to a Bloomberg News survey.

Thirty-three of 44 economists surveyed said the central bank will remove the two-word phrase from its post-meeting statement in 2011, with 18 betting it will move by September. The Fed may wait until 2012 to announce sales of mortgage or Treasury securities it bought to reduce borrowing costs, with 26 respondents expecting a plan next year, according to the survey, conducted from April 20 to April 25.

Chairman Ben S. Bernanke, who gives his first press conference today after a meeting of policy makers, has signaled he wants to ensure the U.S. economy has achieved self-sustaining growth before the Fed starts to raise borrowing costs and trim its $2.69-trillion balance sheet. Regional Fed presidents, including Philadelphia’sCharles Plosser, have said the Fed may need to contain inflation by raising interest rates this year.

“They’re trying to walk this path, given all the economic uncertainties, between people who want to stay very, very easy and people who want to tighten up the grips pretty quickly,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina.

The Federal Open Market Committee will release its statement at 12:30 p.m. in Washington at the end of a two-day meeting, which resumed today at about 8:30 a.m. After prior meetings, the FOMC released the statement at 2:15 p.m. Instead, Bernanke is scheduled at that time to meet the press, and the Fed will release economic projections of policy makers, three weeks earlier than its practice since 2007.

End as Planned

Economists expect little change in the FOMC statement today compared with its post-meeting comments on March 15. The Fed will probably confirm that its $600 billion of Treasury purchases, dubbed QE2 for the second round of quantitative easing, will end as planned in June, Silvia said. All 83 economists in a separate survey predict the Fed will keep the main interest rate in a range of zero to 0.25 percent, its level since December 2008.

Since the Fed announced the second round of asset purchases on Nov. 3, yields on 10-year Treasuries increased to 3.31 percent as of yesterday from 2.57 percent, while the Standard & Poor’s 500 Index gained 12 percent, yesterday reaching the highest level since June 2008. The dollar has weakened by 3.5 percent to the lowest since August 2008 against an index of six currencies.

Top Lieutenants

Bernanke and his colleagues are debating how the central bank should respond, if at all, to the 1 percentage-point drop in the jobless rate since November and surging food and fuel prices. The chairman and his top two lieutenants, Vice Chairman Janet Yellen and Federal Reserve Bank of New York President William C. Dudley, indicated this month they don’t see an immediate need to tighten credit because the boost to inflation is likely to prove temporary.

“So long as inflation expectations remain stable and well anchored” and the rise in commodity prices slows, then “the increase in inflation will be transitory,” Bernanke said April 4 in response to audience questions after a speech in Stone Mountain, Georgia.

Food and beverage prices rose in the first quarter by the most since 2008, based on the Labor Department’s Consumer Price Index, while the cost of regular, unleaded gasoline has increased by 26 percent this year to $3.88 a gallon as of April 25, the highest since 2008. One measure of inflation expectations, the yield difference between 10-year inflation- linked debt and comparable-maturity Treasuries, has traded within a range of 2.42 percentage points to 2.64 points since February, Bloomberg data show.

Inflation Gains

The inflation gains helped slow U.S. growth to a 2 percent pace in the first quarter, the median estimate of analysts surveyed by Bloomberg News, from 3.1 percent in the prior quarter. The government releases preliminary figures tomorrow.

The Bloomberg survey focused on the “extended period” phrase and also found that 32 of 44 economists expect the Fed this year to halt its policy of keeping its portfolio level stable by replacing maturing mortgage-backed securities with Treasuries. Nine respondents see that happening in June; 12 in the third quarter; and 11 in the fourth period.

The responses indicate that economists expect the Fed to change the statement language and allow its portfolio to shrink before raising interest rates or actively reducing the balance sheet. The Fed began the reinvestment policy in August, aiming to avoid what Bernanke said was a “passive tightening” of monetary policy just as U.S. growth slowed.

Benchmark Rate

A separate Bloomberg News survey conducted from April 1 to April 7 found that just 17 of 74 economists expect the Fed to raise the benchmark overnight lending rate this year.

Ending reinvestment “would be a signal, we believe, that the tightening cycle has begun,” said Dana Saporta, a U.S. economist with Credit Suisse in New York. She forecasts the Fed will make the move in the fourth quarter, about a year before it raises interest rates.

Asset sales wouldn’t occur until at least 2014, Saporta said. “I don’t think Bernanke would necessarily want to be the first chairman to oversee the Fed selling assets at a loss, so I think they’ll delay that.”

The Fed may start preparing investors sooner for the policy shifts with a change in its “tone,” acknowledging economic improvement and risks to inflation, Eric Pellicciaro, head of global rates investments at BlackRock Inc. in New York, said in a Bloomberg Television interview. Pellicciaro wasn’t a respondent in the survey, though he said the “extended period” phrase may change in November.

“It’s going to need to move its policy from the fifth gear down to the third gear,” Pellicciaro said.

To contact the reporter on this story: Scott Lanman in Washington atslanman@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz atcwellisz@bloomberg.net