Fed tipped to inject US$500 billion into economy by 'printing money'

The Federal Reserve will probably begin a new round of quantitative easing this week by announcing a plan to buy at least US$500 billion ($652 billion) of long-term securities, according to economists.

Policymakers meeting today and tomorrow will restart a programme of securities purchases to spur growth, reduce unemployment and increase inflation, said 53 of 56 economists surveyed last week.

Twenty-nine estimated the Fed will pledge to buy US$500 billion or more, while a further seven predicted US$50 billion to US$100 billion in monthly purchases without a specified total. The remainder said the Fed would buy up to US$500 billion or didn't quantify their forecast.

The varied responses reflect differences among Fed officials over the total amount of purchases needed to bolster the recovery.

Policymakers, pursuing unprecedented stimulus, have cut the benchmark rate almost to zero and bought US$1.7 trillion in securities without generating growth fast enough to bring down unemployment from near a 26-year high.

"There's no silver bullet right now," and central bankers have "very few options left in terms of lowering interest rates," said John Silvia, chief economist at Wells Fargo Securities in Charlotte, North Carolina.

He predicted US$500 billion of Treasury and mortgage-backed securities purchases over the next six months. Disagreements among policymakers over whether to incrementally expand the balance sheet or stage a so-called shock-and-awe programme of big asset purchases has created confusion among investors over the likely size and duration of any new easing, said Ward McCarthy, chief financial economist at Jefferies & Co in New York.

"There has not been a uniformity of opinion emanating from the multitude of public appearances from Fed officials," McCarthy said.

He predicts the Fed will buy US$500 billion of securities over the next six months and was among 13 economists who said the purchases would include mortgage-backed bonds in addition to Treasuries.

New York Fed President William Dudley set expectations for US$500 billion in purchases when he said in an October 1 speech that purchases totalling about that amount would add as much stimulus as lowering the Fed's benchmark rate by 0.5 per cent to 0.75 per cent.

Dudley put the US$500 billion figure "in there and it sounded like he was trying to move it along in that direction", said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi in New York, who predicts the Fed will announce up to US$500 billion of purchases by March.


EASY DOES IT
* Quantitative easing is the direct injection of electronic money into the economy - often described as "printing money".
* One approach is for a central bank to buy up financial assets, such as government bonds and mortgage-backed securities with "new" money rather than borrowing it.

- BLOOMBERG