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Federal Reserve more likely to do third round of easing: pros

Federal Reserve will start purchasing assets again, some market observers predict. The chances of the Federal Reserve starting another round of quantitative easing shot up in the last week as markets became unstable.

August 12, 2011

In this Aug. 8, 2011 photo, Jason H. Cristino works on the floor of the New York Stock Exchange, in New York. The Federal Reserve pledged to keep extremely low interest rates for another couple of years. Will it also introduce quantitative easing?

Jin Lee / AP


By Steve Liesman,

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QE3 may be coming after all.

In a dramatic turnabout, market participants now believe the Federal Reserve is more likely than not to resume purchasing assets during the next year in a third round of quantitative easing the August CNBC Fed Survey shows.

"There is no doubt that over the last week the odds of seeing another round of asset purchases has risen significantly ," says Tom Porcelli, chief US economist at RBC Capital Markets. "This doesn’t mean we think it will have any more success than QE2. What this simply reflects is a Fed with few remaining options."

Meanwhile, the 60 respondents—who include economists, stock and bond strategists and portfolio managers—disagree with the S&P decision to lower the US credit rating from Triple-A to Double-A plus.

Fully 70 percent of market participants gave the US the top Triple-A rating, a higher percentage than France and the UK, which are rated Triple-A.

In other survey findings:

  • Participants believe there is now a one-in-three chance that the US enters recession in the next 12 months.
  • The outlook for the federal funds rate—which the Fed uses to influence other short-term interest rates—was lowered to just 0.25 percent by the end of next year, down from a one percent forecast in the July survey.
  • Stocks will rise strongly from the current low levels, but are not seen regaining the highs of this year anytime soon.
  • 57% say the bigger threat to the US is cutting government spending too quickly rather than not getting the deficit under control quickly enough.

After the Fed’s promise this week to keep interest rates low until mid-2013, 46 percent of respondents said the Fed will resume QE, up from 19 percent in the July survey; 37 percent said the Fed will not do QE, compared with 68 percent in July.

Of those who believe the Fed will resume QE, the asset purchases are expected to average average for $628 billion, up from $377 billion in July.

Mike Deuker of Russell Investments predicts: "Look for the Fed to initiate QE3 if the 10-year Treasury yield lingers below 2.25 percent, which is a sign of Japan disease. "

Three regional Fed presidents dissented from the decision to keep rates low, but market participants were in greater agreement with the Fed chairman. The move is supported by 70 percent of respondents, with 20 percent disapproving and 12 percent neutral. (Totals don’t add to 100 percent due to rounding.)

Chris Rupkey of Bank of Tokyo-Mitsubishi called it "just an empty promise." But he added: "Broken promises aren't always a bad thing. Fed policy is still conditional on the economy... Once the crisis passes, the economy will pick up and the Fed will alter its promise."