Federal Reserve Chairman Ben S. Bernanke will probably forgoannouncing a third round of large-scale asset purchases this week,and is more likely to wait until September to unveil plans to buy$600 billion in housing and government debt, according to medianestimates of economists in a Bloomberg News survey.

Eighty-eight percent of economists say the Federal Open MarketCommittee will refrain from starting new purchases at a two-daymeeting beginning today in Washington. Forty-eight percent say theFOMC will announce the buying at its Sept. 12-13 meeting, accordingto the July 25-27 survey of 58 economists.

The FOMC may take further action should the job market not make“sustained progress” in bringing down an unemployment rate stuckabove 8 percent for 41 consecutive months, Bernanke said this monthin congressional testimony. The FOMC wants to see more jobs databefore beginning asset purchases aimed at holding down borrowingcosts, spurring growth and reducing unemployment, said MichaelGapen, senior U.S. economist for Barclays Plc in New York.

Policy makers “don't need to do something immediately becausethe economy is basically treading water,” with a second-quartergrowth rate of 1.5 percent, Gapen said. “What gives the Fed theability to sit tight for now is financial market conditions haven'tweakened that much.”

Rather than increase asset purchases this week, the Fed is morelikely to extend its pledge to hold its main interest rate nearzero beyond its current horizon of late 2014. Twenty-six percent ofeconomists expect the central bank to announce a later date, while74 percent of economists expect the Fed not to change its forwardguidance, according to the survey.

“There's nothing that really suggests the Fed has an itchytrigger finger or that they're champing at the bit to ease policyagain,” said Paul Edelstein, director of financial economics forIHS Global Insight in Lexington, Massachusetts.

By waiting to step up stimulus until September, when Bernanke isscheduled to hold a press conference and policy makers will updateforecasts for growth and unemployment, the FOMC can “give someguidance to markets and link it directly to their outlook for theeconomy,” he said.

The Labor Department plans on Aug. 3 to release its payrollsreport for July. The report is likely to show that employers added100,000 jobs this month, according to the median forecast in aseparate survey of economists, compared with the 80,000 increase inJune.

Asked to estimate the size and composition of new assetpurchases, 34 of 48 economists said a new round of quantitativeeasing will consist of mortgage-backed securities and Treasurysecurities. Thirteen of the 48 economists said the purchases wouldconsist entirely of mortgage-backed securities.

Second Round

The median estimate was for purchases totaling $600 billion, thesame size as the second round of asset purchases announced inNovember 2010. Economists predict the purchases will be splitevenly between Treasuries and mortgage debt.

“In general their preference is to use Treasuries rather thanmortgages, but at this point they're owning more and more of theTreasury market, so there's reason to spread it out,” said JimO'Sullivan, chief U.S. economist for High Frequency Economics inValhalla, New York.

Global stocks rallied last week despite as European Central BankPresident Mario Draghi said July 26 he is prepared to do “whateverit takes to preserve the euro.”

Since Draghi's remarks, the MSCI World Index rose 4.3 percentand the S&P 500 has increased 3.5 percent. The S&P 500 waslittle changed yesterday, closing at 1,385.30. The index is up 10.2percent this year.

Fed officials have identified Europe as one of “two main sourcesof risk,” Bernanke said in his testimony to Congress this month.The other risk is the so-called fiscal cliff, about $600 billion ofspending cuts and tax increases that are scheduled to go intoeffect at the end of the year unless Congress acts.

Bernanke cited a Congressional Budget Office estimate that thefull range of spending cuts and tax increases would knock the U.S.into a “shallow recession” in 2013.

“We are seeing demand being relatively stable,” Jim Compton,chief revenue officer of United Continental Holdings Inc., said ina July 26 earnings call. His company is the world's largestcarrier.

“When we talk about the economy being tepid, we are very muchaware of, particularly Europe, and are keeping our eyes on that,”he said. “We're obviously watching softness in the economy to seewhere that turns.”

While lawmakers may not resolve U.S. fiscal challenges untilafter the Nov. 6 election, economists don't believe the Fed willalter its stimulus based on the political calendar, according tothe survey.

Before Election

Sixty-five percent of the economists surveyed believe the Fedwon't be influenced by politics as it weighs whether to start a newround of bond purchases. Eighteen percent say the Fed will be morelikely to act before the election, while the same proportionpercent say the Fed would be more likely to wait until after Nov.6.

Bernanke testified on July 17 that the prospect for morestimulus hinges on job creation and the outlook for inflation.

“It's very important that we see sustained progress in the labormarket and avoid deflation risk,” he said. “Those are the thingswe'll be looking at as the committee meets later this month andlater this summer.”

Inflation, excluding food and energy, was 1.8 percent in theyear through May, according to the Commerce Department's personalconsumption expenditures index. Including all items, prices rose1.5 percent during the period.

While inflation is below the Fed's 2 percent target, marketexpectations for price gains have increased since the Fed began asecond round of asset purchases and started so-called OperationTwist, a program to extend the average duration of securities inthe Fed's portfolio.

Traders in inflation protected securities predict inflation of2.1 percent over the next 10 years. That compares with 1.5 percentin August 2010, when Bernanke signaled the Fed may initiate asecond round of quantitative easing, and 1.7 percent in Septemberof 2011, when the Fed started Operation Twist.

The Fed chairman said the central bank's tools for easing policyinclude further purchases of Treasuries and mortgage-backedsecurities, altering the Fed's language on the outlook for interestrates and reducing the rate the Fed pays banks on excessreserves.

Economists believe the Fed is unlikely to lower the interestrate on excess reserves. Four percent expect such a move this week,while 14 percent see the Fed doing so in September. Seventy-fourpercent of economists say the Fed won't use the policy tool.

Bloomberg News

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