— Retransmitting to Add Topic Codes
— Action More Likely At November FOMC

By Alyce Andres-Frantz

CHICAGO (MNI) – Most chief economists on the primary dealerships
expect the Federal Open Market Committee to hold off on initiating a
second round of quantitative easing at Tuesday’s meeting.

Economists at BNP said while they do not anticipate a second round
of quantitative easing Tuesday, “we look for significant changes to the
policy statement that will formalize a bias toward policy easing and
explicitly identify the expansion of their securities portfolio as the
next likely step.”

They added the “Fed is proceeding methodically in order to make
sure its policy has the most traction. Therefore they must build the
case for monetary easing from a solid foundation.”

“The message Tuesday will be that the economy is guilty of
unacceptable slow growth unless incoming data prove it innocent by
indicating an acceleration before the next FOMC meeting,” economists at
BNP said, adding that they look for a new round a large-scale asset
purchases at the November FOMC meeting.

Robert Mellman, economist at JP Morgan said the Fed will likely
“set the stage for another large-scale program of purchases of
Treasuries… if appropriate.”

Specifically, Mellman said, “We think that there is roughly a 25%
chance that there will be an announcement that QE begins in the very
near future, a much larger chance that the statement prepares the
markets for QE starting after the November meeting, and some small
chance that there is no specific mention of QE but just an implication
that QE may start as early as November.”

Additionally, Mellman said, “We think that the Fed will mention
prospects for subdued inflation and moderate growth but with sustained
high unemployment.”

Economists at Goldman Sachs said, “Though we ultimately expect the
Fed to purchase at least another $1 trillion in Treasury securities, we
think it probably will take more time for the FOMC to reach agreement on
such a major step.”

They look for a “more dovish statement that explicitly reflects a
dimmer economic growth outlook and nods in the direction of further
easing via changes to its forward-looking guidance on policy.”

Meanwhile, Dean Maki, economist at Barclays Capital said, “We think
the incoming data since the August meeting will keep the Fed on the
sidelines in September” in terms of asset purchases.

However, Maki also expects “the FOMC statement to acknowledge some
improvement in the data while balancing the expectation of a gradual
return to higher levels of resource utilization with a cautious tone on
the pace of the recovery in the near term. We expect the statement to
continue to indicate that business and household spending remain
constrained by high unemployment, modest income growth, housing sector
weakness, and tight credit…we expect the FOMC to maintain the
‘extended period’.”

Jay Feldman, economist at Credit Suisse said recent data should
allow the Fed to postpone a decision on a second round of QE.

Instead, Feldman said other options for the Fed include modifying
the wording of the statement and lowering IOER. While they do not expect
either, the Fed could make a “subtle upgrade” in description of economic
conditions. There is still risk of ease in future given “the likelihood
that unemployment will remain unacceptably high for the foreseeable
future.” Feldman does not expect any QE announcement at this meeting.

In contrast, economists at Morgan Stanley said there is
“considerable risk that the Fed may open the door to QE2,” at the
current FOMC “even if upcoming economic data stabilize.”

Economists at Morgan Stanley said QE2 may come via “a vague outline
for a plan to buy assets,” balance sheet expansion and low rates. MS
believes the Fed would rather act sooner rather than later as to not
disrupt the November elections. But, they added if economic conditions
warrant, the Fed may act closer to the election.

Meanwhile, Tom Porcelli, head of U.S. economics at RBC sees no risk
of an announcement on more QE at the September meeting and remains
unconvinced “it happens at the November meeting either.”

Porcelli added the Fed might mark down their growth assessment but
this will be only “a gradual scaling back given the round of data during
the inter-meeting period.” He does not look for the Fed to make any
other meaningful changes in the language.

Ward McCarthy, economist at Jeffries, said the Fed will refrain
from a QE2 announcement. But, the central bank “may attempt to frame
financial and economic conditions that would warrant another” QE.

McCarthy said there would have to be “a significant deterioration
in economic activity (eg deflation) or another financial crisis” to get
more QE, and in any case it is unclear that more securities buying would
affect the economy, as Bernanke said at Jackson Hole.

Steven Ricchiuto, chief economist at Mizuho, said looks for no
changes in the FOMC language or an announcement on more QE2.

–email: aandres@marketnews.com

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