NEW YORK/WASHINGTON (Reuters) - A much weaker-than-expected U.S. labor market alongside escalating financial turmoil in Europe raised Wall Street’s expectations the Federal Reserve will intervene to protect the fragile U.S. economic recovery, according to a Reuters poll.
The median of forecasts from 15 primary dealers - the large financial institutions that do business directly with the Fed - showed 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.
Weaker growth around the world and the rising risk of a full-scale financial crisis in Europe should Greece exit the euro zone threaten to deliver fresh blows to the United States.
The prospect of the economy hitting a “fiscal cliff” with the scheduled expiration of tax cuts and deep automatic spending cuts early next year presents another threat.
Some economists said the Fed may bide it’s time to see if jobs growth bounces back, but others think the central bank could move as soon as its next meeting on June 19-20.
Nine 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 Fed has held overnight interest rates near zero since December 2008 and has bought $2.3 trillion in mortgage-related and government debt in a further bid to depress borrowing costs.
As the recovery faltered last year, the Fed launched a program to replace $400 billion worth of shorter-term bonds in its portfolio with longer-term ones in the hopes of pushing long-term rates lower. This program, dubbed “Operation Twist,” is due to expire at the end of the month.
The median of forecasts from the 15 dealers consulted on Friday was a 35-percent chance of the Fed extending “Operation Twist,” at the June policy meeting.
Fed Chairman Ben Bernanke goes before the U.S. Congress on Thursday and his testimony will be closely parsed for clues on the central bank’s next step. Fed Vice Chair Janet Yellen may also provide a road map in a speech on Wednesday.
Morgan Stanley put chances of further monetary stimulus at 80 percent, with the most likely prospect further outright bond purchases.
“Slower employment growth, worsening strains in European markets, and a gloomier assessment of U.S. politicians’ ability to steer clear of the impending fiscal cliff makes it likely that the Fed will mark down its already tepid forecast,” analyst Vincent Reinhart, a former senior Fed staffer, wrote.
“This should provide all the justification the Fed needs to launch further unconventional policy action via changes in its balance sheet,” he said.
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 with Reuters published on Friday 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 Gary Crosse and M.D. Golan