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Most US primary dealers see Fed trimming purchases in March 2014

A majority of US primary dealers polled by Reuters on Tuesday said the Federal Reserve would not start cutting its monthly bond purchases until March of next year and said the recent government shutdown and stand-off over raising the US debt ceiling had significantly impacted on the Fed's timing.

News that US employers added far fewer workers than expected in September, suggesting a loss of momentum in the economy, only reinforced the view that cuts in the amount of Treasuries and mortgage-backed securities the Fed has been buying to stimulate the economy are being nudged farther out on the horizon, in contrast to the once-widespread notion that cutbacks would be announced in September 2013.

In the Reuters poll, nine of 15 dealers said they expected the Fed to begin tapering its purchases in March. Two dealers said they expected a tapering announcement to occur at the Fed's January 28-29 policy meeting. Two widened that timeframe to the first quarter of 2014. One said cutbacks would be announced no sooner than January. One said the Fed would not announce cutbacks in its purchasing program until June 2014.

The 15 primary dealers polled offered a median estimate that the Fed would cut its purchases by $15 billion a month, a size unchanged from a Reuters poll of 18 dealers done in September.

Eight of the 15 dealers said the recent US budget impasse and debt ceiling stand-off had had a significant impact on the timing of the Fed's eventual tapering of its purchases.

"The impact was significant," said Thomas Simons, money market economist at Jefferies & Co in New York.

Uncertainty about what will happen when the debt ceiling must be raised again on February 7 makes it unlikely the Fed would announce a tapering sooner than its January 28-29 meeting, he said.

An encore of October's government shutdown and debt ceiling crisis early next year is somewhat improbable so that variable may exercise less influence on Fed policy than it did this year, said Michael Moran, chief economist at Daiwa Securities America.

"I think they'll find a way to side-step it," he said. "I cannot imagine Republicans being foolish enough to have a repeat of what we had in the last month or so. I think they will come up with some kind of agreement. Certainly they won't shut the government down. But the absence of a budget or passage of another continuing resolution would lead the Fed to be uncertain and keep quantitative easing going." The median of forecasts from the 15 dealers polled on Tuesday was for the central bank to initially shave $15 billion per month from its purchases, the same amount predicted in the September 6 poll. Estimates ranged from $10 billion to $20 billion on October 22, compared to $10 billion to $25 billion on September 6.

Copyright Reuters, 2013


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