Chairman Ben S. Bernanke will probably reduce the FederalReserve's monthly bond buying in the fourth quarter to $50 billionfrom $85 billion as he begins to unwind record stimulus, economistssaid in a Bloomberg survey.

Policy makers must find a way to slow the pace of purchasesenough to signal confidence the economy is strengthening withoutprompting a sudden rise in interest rates, said former Fedeconomists Michael Feroli and Joseph LaVorgna. They said thatprobably means the Fed, which concludes a policy meeting today,will follow a three-step strategy to wind down bond buying.

“There is concern the first taper would be misinterpreted as theonset of a tightening cycle” and cause interest rates to go up,said Feroli, chief U.S. economist at JPMorgan Chase & Co. inNew York. An initial reduction to $50 billion to $60 billion amonth, followed by a second cut to $30 billion and then a halt tobond buying “would be enough of a runway to know and gauge theeffects of what they're doing, but not too long a runway where it'sa painfully interminable process.”

The Federal Open Market Committee plans to release a statementat 2 p.m. after a meeting in Washington. None of the 47 economistsin the Bloomberg survey taken April 25-29 expects a decision atthis week's meeting to change the pace of purchases.

Withdrawing accommodation after an open-ended program of bondbuying is “unprecedented territory” for the central bank, saidLaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. inNew York. Cutting purchases by about a third would allow the Fed togauge the reaction of the economy and investors. If the economystrengthens, the Fed could keep tapering purchases, he said. Ifinterest rates rise and threaten growth, policy makers could reneweasing.

“You want to see how the market is going to digest a cut inpurchases so you want to do it in a way that minimizes thedisruption,” said LaVorgna, who was among economists in theBloomberg survey.

The Fed began purchasing $40 billion a month of mortgage-backedsecurities in September and announced in December additionalpurchases of $45 billion a month of Treasury securities.

The FOMC in a statement after its last meeting on March 20reiterated a pledge to keep buying bonds until the labor marketimproves “substantially.” Bernanke said at a press conference thesame day that policy makers are considering a proposal to“appropriately calibrate” bond purchases based on the performanceof the economy, including the job market.

Quantitative Easing

The bond purchases, known as quantitative easing, have helpedpush up stock prices and reduce bond yields. The yield on the10-year Treasury note yesterday was little changed at 1.67 percentin New York, near a low for 2013, as signs of weakness in theeconomy allayed concerns the Fed may curtail bond buying. TheStandard & Poor's 500 Index closed at a record high 1,597.57,as a rise in consumer confidence offset a drop in businessactivity.

The median estimate in the Bloomberg survey predicts a reductionin monthly purchases during the fourth quarter to $25 billion inTreasuries and $25 billion in mortgage-backed securities.

While too big a cut may trigger concerns that a policytightening is imminent, too small a reduction would be difficultfor investors to interpret, said Michael Gapen, senior U.S.economist and head of U.S. asset allocation strategy for BarclaysPlc in New York.

St. Louis Fed President James Bullard has proposed the Fed alterpurchases by $10 billion to $15 billion per meeting depending onthe outlook for the economy. Such an approach may “put too muchprecision on it,” Gapen said.

“I can't tell you there's a meaningful economic differencebetween $85 billion a month and $70 billion a month,” said Gapen, aformer Fed economist.

Fed Vice Chairman Janet Yellen and New York Fed PresidentWilliam C. Dudley have backed the idea of adjusting purchases,without providing an estimate of how much to shrink or enlarge themat each step.

Calibrating bond buying will “provide the public withinformation regarding the committee's intentions and should reducethe risk of misunderstanding and market disruption as theconclusion of the program draws closer,” Yellen said last month ina speech in Washington.

The U.S. job market remains short of the FOMC's goal ofsubstantial improvement, with employers adding 88,000 positions inMarch, the fewest since June.

Jobs Report

The Labor Department on May 3 will probably say the unemploymentrate in April remained unchanged at 7.6 percent as employers added148,000 jobs, according to the median estimate in a separateBloomberg survey.

The odds that easing will end early have declined, according tothe economists in the survey, following weak payroll expansion andbelow-forecast economic growth of 2.5 percent in the first quarter.Only 11 percent expect the Fed to halt purchases in the fourthquarter compared with 22 percent in a March poll. Sixty-one percentare forecasting an end to the buying in the first half of 2014.

Bullard said in an April 3 interview with Bloomberg radio thatbond buying is moving “full steam ahead.” The third round ofquantitative easing will total $1.18 trillion, according to thesurvey. So far the purchases have pushed the Fed's balance sheet toa record $3.32 trillion.

The Fed probably won't abruptly halt bond purchases, said StuartHoffman, chief economist at PNC Financial Services Group Inc. inPittsburgh and a participant in the survey. He predicts the Fed inits first move will reduce buying by half.

“The Fed has signaled in many ways that when they finally do seesignificant improvement, they won't go cold turkey” on bondpurchases, he said.

Bloomberg News

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