Dealers See Chance of Fed’s Operation Twist: Reuters Poll

Wall Street sees an eighty p.c chance the Federal Reserve will intervene in the bond market to lower long-term interest rates, in line with a Reuters poll, once a report showed the U.S. jobs crisis deepened in August.

The poll was conducted once a government report on Friday showed job growth fell to zero last month, which sparked a colossal rally in longer-dated Treasuries as investors put cash behind their expectations for Fed action.

Economists conjointly reduced U.S. growth expectations and assigned an increasing chance to the central bank embarking on QE3, or another spherical of outright Treasuries purchases that expand the size of the Fed’s portfolio of bonds.

Some even think the central bank’s policy-setting Federal Open Market Committee may announce action at its September 20-21 meeting.

“The recent economic knowledge, together with the August employment knowledge, isn’t reaching to sit well with the FOMC and can give support for the majority of policymakers who want policy to remain terribly accommodative,” said Thomas Simons, cash market economist at Jefferies & Co in ny.

“All of this will increase our confidence in our expectation that the FOMC will attempt to implement an extension of the Fed’s securities portfolio at the September 20-21 FOMC meeting in a trial to flatten the yield curve,” Simons said.

The median of forecasts from sixteen of twenty primary dealers ascribed an eighty p.c chance the Fed will pump cash into the economy by selling shorter-dated Treasuries it holds and buy longer-dated bonds in the next six months.

Investors have already been discussing such a move, which they need dubbed Operation Twist.

The market’s reaction was conjointly clear, with shorter-dated Treasuries selling off and 30-year bonds posting the most important single-day dip in yield in nearly a month.

Friday’s payrolls report — which showed the economy did not produce jobs for the first time in nearly a year — added to recent evidence the u.  s. could be headed back into recession.

“Today’s disappointing payroll results bolster the arguments of those FOMC members that have spoken in favor of extra accommodation. we have a tendency to still look for the Fed to extend the maturity of its $1.7 trillion Treasury portfolio as an initial easing step. The announcement of such a move is likely to come in the September 21 FOMC policy statement,” said Dana Saporta, economist with Credit Suisse in ny.

Economists at primary dealers — the twenty giant financial institutions that do business directly with the Fed — are upping the possibilities the Fed will fan the flames of a QE3 program to expand its balance sheet by buying longer-dated Treasuries on the open market.

The median of forecasts from sixteen of the twenty primary dealers gives a forty five p.c chance the Fed will do a QE3 program in the next six months. the same poll on August 9 gave QE3 a thirty seven.5 p.c chance over subsequent six months.

“We anticipated a recession even before the August payrolls, and therefore the fact that the recent loss of confidence has already permeated into hiring decisions solely reinforces that expectation,” said Julia Coronado, economist North America at BNP Paribas in ny.

“We don’t think the Fed will hesitate to initiate QE3 at the September meeting and that we believe an outright growth of the balance sheet would be more practical than the duration extension currently under consideration.” Julia Coronado, economist North America at BNP Paribas in ny.

In the most recent Fed growth of its balance sheet, referred to as QE2, the central bank bought $600 billion of Treasuries in an exceedingly program that wound up in June.

Economists are scaling back their expectations for U.S. growth, with the median of forecasts from 15 primary dealers putting 2011 annualized gross domestic product at one.6 p.c year over year, down from one.7 p.c in the August 9 poll.

As a comparison, the government estimated gross domestic product grew by 3 p.c in 2010.

The median of forecasts from 15 primary dealers was a thirty two.15 p.c chance the u.  s. will fall into another recession in the next year, up slightly from 30 p.c in the August 9 poll.