Federal Reserve Chairman Ben S. Bernanke says he'll stoke theeconomy until the job market recovers “substantially.” That promisemay force him to keep buying bonds until the final months of histerm ending in January 2014, according economists in a Bloombergsurvey.

Sixty-eight percent of 60 economists said the Fed chairman'sthird round of quantitative easing will last until late next yearor beyond. Just 51 percent of them said the strategy will helpboost employment, with a median estimate of 116,000 jobs over thecourse of next year.

“The recovery in the labor market is probably going to be moresluggish than the Fed recognizes” said Michael Hanson, senior U.S.economist at Bank of America Corp. in New York and a former Fedeconomist. He said policy makers have “painted themselves in a bitof a corner, waiting to see a significant improvement in the labormarket.”

Bernanke said in August that new bond buying, while spurringgrowth and generating jobs, may erode confidence the Fed will exitsmoothly from record accommodation, including the first two roundsof bond purchases totaling $2.3 trillion. Most surveyed economistsbelieve Bernanke has gone too far with quantitative easing, with 55percent saying policy is too easy, compared with 48 percent whosaid so in a Sept. 7-10 survey.

Bernanke and his colleagues on the Federal Open Market Committeewill conclude a two-day meeting in Washington today and release astatement on policy, including their current plan to buy $40billion in mortgage-backed securities each month for an indefiniteperiod.

By not buying bonds, the Fed would increase the risk of“structural damage” to the economy as skills atrophy among workersfacing long-term unemployment, Bernanke said on Aug. 31.

More than 4.8 million Americans have been out of work for sixmonths or more, Labor Department data show. Bernanke said in theAugust speech in Jackson Hole, Wyoming, that the first two roundsof quantitative easing generated 2 million jobs.

The Fed started its third round of easing even as it continuedOperation Twist, a program to lengthen the maturities of the assetsalready on its balance sheet by swapping about $45 billion a monthof short-term debt and buying the same amount of longer-termTreasury securities.

That program is due to end in December. Seventy-two percent ofthe economists said the Fed in January will make up for the end ofOperation Twist with monthly purchases of as much as $45 billion inTreasury securities in addition to the mortgage-bond buying. Thecentral bank may wait for their Dec. 11-12 meeting before decidingwhat to do after Operation Twist.

Dealers that trade directly with the Fed also expect the centralbank to continue buying Treasuries after Operation Twist ends,according to a separate Bloomberg survey.

“The odds are slightly tilted in favor of them adding furtherTreasury purchases after Twist is done,” said Michael Feroli, chiefU.S. economist at New York-based JPMorgan Chase & Co. and aformer researcher for the Fed Board in Washington. “I don't thinkwe'll have seen enough improvement for them to be satisfied, and ifthere are fiscal headwinds coming next year they'll want to providesome extra accommodation.”

Economic output would shrink by 0.5 percent next year, andjoblessness climb to about 9 percent if the so-called fiscal cliffisn't averted, according to the Congressional Budget Office. Theterm refers to $607 billion in U.S. federal spending cuts and taxincreases scheduled to take effect in January unless Congressacts.

A slowdown in global growth may also inhibit the U.S. expansion,Bernanke has said.

The world economy will grow 3.3 percent this year, the slowestsince the 2009 recession, and 3.6 percent next year, theInternational Monetary Fund said this month, compared with Julypredictions of 3.5 percent in 2012 and 3.9 percent in 2013. TheWashington-based lender sees “alarmingly high” risks of a steeperslowdown, with a one-in-six chance of growth slipping below 2percent.

The Standard & Poor's 500 Index rose to a 2012 high on Sept.14, the day after the Fed announced QE3. Since then the benchmarkhas dropped 3.6 percent as companies including DuPont Co. and 3MCo. reported earnings that spurred concern the economy isweakening. The index is up 12 percent this year.

The yield on the 10-year Treasury note slipped 0.06 percentagepoint yesterday to 1.76 percent, the same level as the day beforethe last FOMC meeting. The yield fell to a record low 1.38 percentin July.

Peoria, Illinois-based Caterpillar Inc., the world's largestmaker of construction and mining equipment, this week forecastsales growth for 2013 that would be slower than in the previousthree years as the global economy loses momentum.

Rising GDP

The U.S. economy grew at a 1.3 percent pace in the secondquarter, slower than a prior estimate of 1.7 percent, afterincreasing at a 2 percent rate in the first. Economists predictgross domestic product will rise by 1.8 percent in the thirdquarter, according to the median of 85 estimates in a Bloombergsurvey.

By combining Treasury and mortgage-backed securities purchasesand continuing QE3 for 18 months, the central bank's balance sheetcould grow by $1.5 trillion or more, said Jeremy Lawson, seniorU.S. economist at BNP Paribas SA in New York.

Lawson said he forecasts growth of 2.1 percent next year and 2.7percent in 2014. Without the open-ended bond purchases, theexpansion would be closer to 1.9 percent and 2.5 percent in thoseyears, he said.

By the end of 2014, bond buying should help push downunemployment to about 7.3 percent compared with about 7.5 percentwithout the program, Lawson said. While helpful, QE3 is “not apanacea for the headwinds that the economy faces.”

Bernanke has repeatedly said quantitative easing isn't acure-all. The central bank forecast in September that the joblessrate will fall slowly, with unemployment ranging from 7.6 percentto 7.9 percent at the end of next year and from 6.7 percent to 7.3percent at the end of 2014.

The jobless rate unexpectedly fell to 7.8 percent in September,the lowest since January 2009. The economy added 114,000 workerslast month after a revised 142,000 gain in August that was morethan initially estimated.

“The reason that the economic recovery has been sluggish for thelast three years is that there's been a lot of headwinds holding itback,” said Josh Feinman, a former Fed senior economist. He iscurrently the New York-based global chief economist for DBAdvisors, the Deutsche Bank AG asset management unit, whichoversees $220 billion. “All the nasty residue of the bubble hasimpeded the normal transmission mechanisms of traditional monetarypolicy easing.”

Bloomberg News

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