By Yali N’Diaye

WASHINGTON (MNI) – The Federal reserve has said economic conditions
warrant “exceptionally low” policy rates at least through mid-2013, but
in a survey released Wednesday several primary dealers “highlighted
their expectations that there would be no policy tightening within the
next two years.”

Odds the Fed will increase the federal funds rate for the first
time in the third quarter of 2013 are 14%, and odds the first rate hike
will be in the following quarter are 12%, according to primary dealers
in the New York Federal Reserve Bank’s survey conducted between Dec.
2-5. That was before the Dec. 13 Federal Open Market Committee meeting.

Beyond the second quarter of 2014, dealers estimate on average that
the chance of the first rate increase is 45%.

Asked to assign a percentage to the FFR or range within 12 month,
primary dealers said on average there is a 95% chance the rate will
still be in the current range, the chance falls to 3% for a rate of
0.26%-0.50% and 1% for 0.51% and 1.0%. There is no chance the FFR be
above 1.0% by the end of 2012, according to the survey.

In the near term, primary dealers estimated the chance that the FFR
remains between 0% and 0.25% at 99% through March.

Prior to the Dec. 13 FOMC meeting, while most did not expect policy
changes, “Several dealers suggested the FOMC would acknowledge some
improvement in U.S. economic data since the release of the November
statement, with some expecting an upgrade in the Committee’s assessment
of labor market conditions.”

Surveyed about the effectiveness of the Fed communication policy,
“Many dealers viewed FOMC communication over the intermeeting period as
clear and effective,” although some pointed out the “disparate messages”
coming from fed officials, the survey said.

Dealers see a high probability of a change in the forward guidance
on the path of the federal funds rate within two-year horizon, and
expect guidance on the period over which the SOMA portfolio will remain
at the current level.

“Regarding potential SOMA expansion and duration increases, several
dealers stated expectations that these operations would likely be
carried out using agency MBS,” the survey said.

While several dealers do not expect any policy tightening within
the next two years, “Some explained that their relatively higher
probabilities over the 2-year horizon for halting reinvestments,
changing guidance on the target rate, and draining reserves reflected
the likelihood that such steps will precede any rate increase, even if
such a move is not expected to occur within 2 years,” the survey said.
“A few dealers noted that the anticipated timing of any securities sales
remains far off.”

The survey also showed that “Many respondents expect that
additional information on policy objectives will come in the form of an
explicit inflation objective,” the survey said. “Most of these dealers
also commented that the inflation target would likely be accompanied by
an explicit unemployment forecast or further guidance on the FOMC’s
goals for this aspect of the Federal Reserve’s mandate.”

Interestingly, “many” dealers expected back in December “the
publishing of a federal funds rate forecast as one possible change” to
the Summary of Economic Projections, a change that was announced Tuesday
by the Fed.

Regarding their outlook, “Most respondents cited the eurozone
sovereign debt and banking situation as a major source of downside risk
to their forecasts,” the survey said, with many also citing the U.S.
fiscal situation.

They said fiscal integration, fiscal austerity and “a legitimate
enforcement method for any centralized fiscal policies” in the euro zone
would be necessary to resolve the crisis.

** Market News International Washington Bureau: 202-371-2121 **

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