Federal Reserve seeking central bank asset purchase projections

28 October 2010

The Federal Reserve is conducting a survey of bond dealers and investors in an attempt to discover how many central bank asset purchases are likely to be made in the next six months.

According to Bloomberg, the Fed wants to use the data to analyze what the possible effect of new economic stimulus packages would be in the US.

In the questionnaire, firms have been asked about their expectations regarding the size and timing of a new debt purchase program.

With unemployment levels in America close to reaching their highest point for 26 years, the Federal Reserve is considering whether it should intervene in the economy.

Earlier this month, William Dudley, president of the New York Fed and vice chairman of the Federal Open Market Committee, said around $500 billion could be pumped into the system with a new round of quantitative easing.

But financial market participant said that the Fed may need to commit to providing a figure that is double this amount when policymakers meet in early November.

Joseph LaVorgna, chief US economist at Deutsche Bank Securities, said: "What the market wants to hear is that the Fed is going to buy $1 trillion.

"Concerns that it might be less is causing investors to worry about how deep and broad this program is going to be."

Stephen Stanley, chief economist at Pierpoint Securities, said that the Fed has a potentially difficult balancing act on its hand when it makes a decision.

"If they buy too much, I think there's a real chance that rates are going to rise because people are worried about inflation," he stated. "If they don't buy much, they're not going to have a market impact."

Earlier this month, Charles Evans, president of the Chicago Federal Reserve, said the US economy is currently stuck in a "bona fide liquidity trap", in which low interest and high saving rates are making it difficult for monetary policy to have an effect, reported the Financial Times.

By Gary Cooper

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