WEAK US employment figures have spurred speculation the Federal Reserve will announce a return to “unconventional” quantitative easing (QE) at tomorrow’s policy meeting.
After figures on Friday showed 131,000 Americans lost their jobs in July, more than double the number expected, analysts at Goldman Sachs said the Fed could begin using the proceeds from maturing mortgage-backed securities to buy other debt instruments or Treasury bonds.
A similar programme between March 2009 and March this year saw the Fed purchase $1.7 trillion (£1 trillion) of mortgage and government debt. Goldman Sachs predicted at least $1 trillion of activity should the Fed decide to re-activate the policy.
“This would be a ‘baby step’ in the direction of renewed unconventional easing, although it would probably be packaged as a decision to prevent a gradual tightening of the overall stance,” analysts led by chief US economist Jan Hatzius wrote in a note.
US Treasury prices rose and yields fell at the end of last week in anticipation of such a move. Yields on 10-year notes fell eight basis points to 2.83 per cent, with yields on two-year notes falling three basis points to 0.51 per cent, close to a record low.
Fears over the sustainability of the US economic recovery have grown since housing starts suffered the sharpest one-month decline for more than a year in May. Despite a season of strong corporate earnings, observers believe a shift in the Fed’s language points toward further monetary intervention.
The dollar weakened against the euro and sterling on Friday as markets absorbed the poor jobs data and the prospect of more QE.