Wall St boosts QE3 expectations after May jobs data

NEW YORK Sat Jun 2, 2012 7:49am IST

A man holds his identification card and US dollar banknote at the exchange office of a local bank in Yangon April 2, 2012. REUTERS/Soe Zeya Tun/Files

A man holds his identification card and US dollar banknote at the exchange office of a local bank in Yangon April 2, 2012.

Credit: Reuters/Soe Zeya Tun/Files

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NEW YORK (Reuters) - Wall Street economists see an increased chance the Federal Reserve will launch another round of monetary stimulus to support the U.S. economy, following data showing jobs growth slowed markedly for a third straight month in May.

The median of forecasts from 15 primary dealers - the large financial institutions that do business directly with the Fed - gave a 50-percent chance the central bank would eventually launch another round of quantitative easing, known as QE3.

A similar poll done on May 4 resulted in the median of forecasts from 14 primary dealers giving a 33 percent chance of the Fed eventually undertaking QE3.

The latest poll was conducted on Friday after the government said employers added only 69,000 jobs to their payrolls last month, the smallest number since May of last year, and 49,000 fewer jobs were created in the prior two months than had been thought. The jobless rate also rose for the first time in nearly a year.

"We think that the odds of QE3 remain elevated, and have risen somewhat on the back of today's data and the situation in Europe," said Michael Hanson, economist at Bank of America Merrill Lynch.

"The announcement of QE3 entirely depends on how the U.S. data evolve - if we have another few months of very weak payrolls, then additional (quantitative) easing is likely."

Several economists said they had already boosted their expectations of more stimulus from the Fed based on the outlook for the economic fallout if Greece eventually leaves the euro and Spain requires a massive financial bailout.

With China's economy slowing in addition to the euro zone's debt problems, the payrolls data added to worries of a global economic slowdown.

"The May employment report was quite weak, and it does raise the odds of Fed action this month significantly," said Dean Maki, chief economist at Barclays Capital in New York.

Nine of the 14 dealers answered a question on the timing of QE3, with six of them calling for the program to be announced in the second half of the year. Two of the nine said any QE3 program would be announced in June, while one called for the announcement in June or September.

The median of forecasts from the 15 dealers consulted on Friday gave a 35-percent chance of the Fed extending its current stimulus program, known as "Operation Twist," at the its next policy meeting on June 19-20.

The Twist program extends the maturity of the central bank's Treasuries holdings in a bid to bring down long-term borrowing costs like mortgage rates. The program is set to expire at the end of June.

"The Fed's dual mandate is being seriously challenged through disappointing jobs data and sharply falling market inflation expectations. The Fed is likely to respond to this with additional stimulus, and to make a difference in this market it has to be sizeable and not just a marginal extension of Twist," said Derek Holt, economist at Scotiabank in Toronto.

The Fed has said repeatedly it stands ready to take whatever measures it deems necessary to prop up the economy.

Boston Fed President Eric Rosengren said in an interview published on Friday before the employment report that even more aggressive policy moves would be warranted if the jobless rate starts to rise.

Rosengren, a dovish central-bank policymaker who this week upped the ante for more Fed stimulus, said the best course of action would be prolonging Operation Twist.

Friday's poll found nine of 14 primary dealers expect the Fed to raise interest rates from the current level near zero in 2014, while two forecast a rate increase before that time and three saw it after 2014.

The central bank has said it intends to hold rates at a very low level through to at least late 2014. (Additional reporting by Pam Niimi; Editing by)

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