The Federal Reserve could announce a reduction of its monthly bond purchases as early as September if employment and inflation strengthen enough, said Jan Hatzius, chief economist at Goldman Sachs Group Inc.
While Goldman Sachs' forecast remains for Fed officials to wait until December before slowing their $85 billion of monthly asset purchases, Hatzius said that so-called tapering could occur sooner.
“A September tapering is certainly possible, I think that is going to depend on the data,” Hatzius said in a Bloomberg Television interview at Goldman Sachs' Global Macro Conference in London.
Speculation that a strengthening U.S. economy will allow the Fed to reduce its monetary stimulus has helped propel the yield on the 10-year Treasury bond to its highest since April 2012 even as Chairman Ben Bernanke expresses caution over trimming the program too soon.
The likelihood that the economy will continue to grow about 2 percent over the next couple of quarters with inflation “well below” target will probably stay the Fed’s hand until December, Hatzius said.
By contrast, an earlier pullback could occur if payrolls regularly increase by more than 200,000 a month or inflation outside of food and energy costs speeds up.
“It’s definitely a mosaic of different indicators,” Hatzius said. “It’s the broad picture.”
Bernanke said May 22 during a response to questions following Congressional testimony that the central bank could consider reducing the amount of assets it buys within “the next few meetings” if officials see signs of sustained improvement in the labor market. Still, he has warned that “premature tightening” could reduce inflation and jeopardize the economic expansion.
With unemployment lingering at 7.5 percent, higher than before the last recession, the policy-setting Federal Open Market Committee announced May 1 it will increase or decrease the pace of its monthly purchases in response to changes in inflation and the labor market.
Policy makers agreed to maintain monthly buying of $40 billion in mortgage securities and $45 billion of U.S. Treasurys in a bid to boost employment. The purchases have expanded Fed assets to about $3.4 trillion.
Even with global bond markets posting their biggest monthly losses in nine years in May, led by a 2 percent drop in Treasurys, Hatzius said the Fed is going to be “very resistant to a large tightening of financial conditions precipitated by a bond-market sell off.”
He predicted the 10-year Treasury bond yield will end 2013 at 2.5 percent and 2014 at 3 percent, up from 2.12 percent. Goldman Sachs anticipates U.S. economic growth of 1.9 percent this year and 2.9 percent in 2014.
Not in his outlook is a repeat of 1994 when a sudden and sharp increase in interest rates from the Fed surprised many investors. Goldman Sachs Chief Executive Officer Lloyd Blankfein said May 2 that the current rate environment has parallels to then.
The Fed increased its benchmark rate 3 percentage points from February 1994 to February 1995, from a then record-low 3 percent to 6 percent. The yield on the 30-year U.S. Treasury bond surged above 8 percent in late 1994 from below 6 percent 12 months earlier.
Still, employment and inflation are weaker than two decades ago, while the Fed has become more transparent and better at communicating its plans to financial markets, Hatzius said.
“We’re not expecting a 1994,” he said.
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