NEW YORK (MNI) – The New York Federal Reserve Bank Wednesday
released its March dealer survey (conducted March 1-5) showing the
median estimate for the first tightening by the Fed in Q3 2014, with the
fed funds median target is 0.75% in the second half of 2014. They saw
93% odds of no change in the fed funds rate over the next 12 months. 19
of 21 dealers gave Fed a 3 or 4 on scale of 5 for communications.

The following are additional excerpts from the release:

2. Do you expect any changes in the FOMC statement and, if so, what
changes? Many dealers expected the March FOMC statement to contain
upgraded language regarding the Committee’s assessment of economic
conditions. Several dealers specifically cited expectations for an
acknowledgement of improved labor market conditions and declines in the
unemployment rate. Several dealers also expected the statement to
reference the recent increases in crude oil and gasoline prices, with a
few anticipating modifications to the inflation language. Expectations
that elevated levels of inflation would be characterized as temporary,
that the statement would acknowledge higher oil prices as affecting
consumer spending, and that economic growth would continue to be modest
were each cited by a couple of dealers. Several dealers expressed the
expectation that there would be no change to the monetary
policy-relevant portions of the statement, while a couple of others
expected no change to the economic assessment.

…

6. How would you grade the Federal Reserve System’s communication
with the markets and with the public since the last policy survey on
1/17/12? Please provide a rating between 1 and 5, with 1 indicating
ineffectiveness and 5 indicating effectiveness.

In their commentary on Federal Reserve communications, some dealers
focused on what they believed to be a discrepancy between the forward
guidance on the path of the federal funds rate and participants’
projections of the appropriate level of the federal funds rate in the
advance materials of the Summary of Economic Projections (SEP). Some
dealers also highlighted that there was a lack of clarity on future
policy action. A few contacts viewed the release of the longer-term
goals and policy strategy document as a positive development, and
characterized the Chairman’s comments at the press conference following
the January meeting as clear. A few other dealers felt that the
Chairman’s comments at the press conference were unclear, with a couple
viewing the Chairman’s characterization of the potential for future
asset purchases as inconsistent with the tone of other Federal Reserve
communications. A few dealers also noted the Chairman’s semiannual
monetary policy testimony, with a couple citing the testimony as
clarifying levels for the federal funds rate that the FOMC considers
“exceptionally low”, and a couple of others citing that it served to
dampen expectations for additional accommodative policy action in the
near term. A few dealers also noted that the wide array of public
remarks made by Federal Reserve officials over the intermeeting period
contributed to a lack of clarity.

7. a) Recent FOMC communication has discussed several different
ways monetary policy could be altered to provide either less or more
accommodation. For each listed policy tool, please indicate the
probability the tool will be used to signal future policy tightening or
to tighten policy at the next FOMC meeting and within the next 1 and 2
years. Please comment.

Several dealers commented on their expectations for the sequence of
steps expected to be taken to tighten policy or to signal policy
tightening in the future, with some dealers expecting a change to the
forward guidance as the first step in the tightening cycle. Some dealers
mentioned halting reinvestments in their commentary. Some dealers
expected no policy tightening over the next two years.

…

Many dealers described their expectations for future asset
purchases. Some dealers expected a future asset purchase program, were
it to occur, to be composed in whole or in part of agency-MBS
securities. Several dealers also commented that a sterilized asset
purchase program or an extension of the current Maturity Extension
Program (MEP) were possible options. A few dealers expected that the
forward guidance on the path of the federal funds rate could be further
modified to ease policy or to signal future easing.

…

Many dealers cited tensions in Iran and the impact of potentially
higher oil prices, with some dealers citing risks posed to their
inflation forecasts, and a few others focusing on risks to consumer
spending and growth. Several dealers also noted continued downside risk
from the ongoing sovereign debt and banking crisis in Europe. Several
dealers identified anticipated U.S. fiscal consolidation as an
additional source of downside risk to growth; however, a few others
cited upside fiscal risks should the expected consolidation ultimately
not materialize. A few dealers cited possible increases in the
unemployment ratebased on increasing labor force participationas
posing risks to their unemployment rate forecasts, while some expected
that the unemployment rate could continue to decline faster than
expected. A couple of dealers noted the downside risk that slowing
global growth could pose to their forecasts.

…

Some dealers indicated that inflation expectations would be an
important factor in determining the timing of the first increase to the
target federal funds rate. Some suggested that core PCE inflation would
be an important factor in addition to headline PCE inflation. Several
dealers indicated that the pace of change in inflation and employment
rates would also be important factors in determining the timing of the
first increase to the target federal funds rate. A few dealers
considered fiscal policy as an important determinant. The state of the
housing market, changes in the labor force participation rate, and the
outlook for global growth were also each mentioned by a couple of
dealers.

13. Please indicate your view of the level of the unemployment rate
that would currently be consistent with full (i.e. maximum
non-inflationary) employment.

Some dealers commented that skill mismatches supported higher
estimates of the unemployment rate consistent with full employment,
while some also believed that geographic mismatches exacerbated by
limited labor mobility, and the effects of long-term unemployment, were
driving factors. A couple of dealers specified that they used a
Beveridge Curve framework to produce estimates.

14. Please comment on any changes to your macroeconomic assessments
since the last FOMC meeting.

Some dealers reported essentially no change to their macroeconomic
forecasts. While a few dealers upgraded their forecasts for GDP growth
in one or more quarters, a couple lowered their forecasts in one or more
quarters. A few dealers lowered their forecasts for the unemployment
rate, and a couple noted that they had increased their forecasts for
inflation based on higher oil prices. A couple of dealers continued to
view evolving sovereign debt and banking concerns in Europe as posing
downside risks to their economic forecasts.

** MNI New York Newsroom: 212-669-6430 **

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