Despite improved U.S. hiring last month, most Wall Street economists still expect the Federal Reserve to do more to stimulate growth this year, with the majority looking for action as soon as September.
The median of forecasts from a Reuters poll of 17 primary dealers - the large financial institutions that do business directly with the Fed - showed a 63 percent chance the central bank will for the third time expand its balance sheet via large-scale bond purchases.
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If the Fed does act, 13 said they thought it would do so at its next policy meeting in September, up from eight in a July 6 Reuters poll of 16 dealers.
There are 21 U.S. primary dealers.
Friday's poll was conducted after a government report showed employers added 163,000 new jobs in July, the most in five months.
That was above the 100,000-job gain economists expected and prompted some dealers to reduce slightly their expectations for a new round of purchases, known as quantitative easing, or QE3.
In the July poll, which followed a weaker-than-expected jobs report, the median forecast showed a 70 percent chance of QE3.
"Better figures in July are consistent with our view that job growth and activity will improve in the third quarter, and we expect that to be enough to keep them on hold," said Dean Maki, chief economist at Barclays Capital.
But many respondents cited underlying weakness in Friday's data, including a rise in the jobless rate to 8.3 percent and revisions showing employers hired fewer workers in May and June than initially reported, as justification for more Fed action.
"The headline number was better but the report was pretty soggy beneath the surface," said Ward McCarthy, chief financial economist at Jefferies & Co, who sees an 80 percent chance of more Fed stimulus. "The labor market, like the economy, is moving forward, but it's a frustratingly slow process."
The U.S. recovery lost momentum over the last few months, with growth slowing to a 1.5 percent rate in the second quarter from 1.9 percent between January and March.
The Fed said this week it was ready to do more if needed, but was short on details. In two prior rounds of QE, it bought $2.3 trillion in mortgage and government debt in a bid to depress borrowing costs.
If the Fed launches QE3, three dealers expected it to buy only mortgages, while the rest expected a mix. The median estimate for the program's size was $500 billion.
Some dealers said the central bank may use the September meeting to announce alternative stimulus measures.
"We expect further Fed asset purchases, and while this is possible at the September meeting if the data continue to disappoint, our central expectation is that a return to QE is more likely in late 2012 or early 2013," said Goldman Sachs economist Jari Stehn.
Instead, Goldman said the Fed may tell markets next month that it does not intend to raise overnight interest rates until mid-2105. These have been near zero since late 2008 and the Fed has said they are likely to stay there until at least late 2014.
Five dealers expect the first rate increase to come that year, while 11 expect the Fed to hold off until 2015 or later. One expected the central bank to raise borrowing costs in 2013.
Michael Gregory, senior economist at BMO Capital Markets, thought policymakers might pair extending the rate rise timeline with reducing the interest rate it pays banks that park their excess reserves with the Fed.
"They kind of reinforce one another, and let's face it, at the end of the day, the Fed would love to have headlines across America saying, 'Fed cuts interest rates,'" he said.
Fed Chairman Ben Bernanke said recently the Fed's discount window could be used to ease policy. That raised speculation on Wall Street that the central bank could cut interest on excess reserves in hopes of encouraging banks to increase lending.
Thirteen of the 17 dealers, however, said they did not expect the Fed to go this route.
Dealers saw just a one-in-four chance of the U.S. economy slipping into recession over the next year.
That calculation could change, though, if potential tax increases and spending cuts take effect in 2013, said Bank of America-Merrill Lynch economist Michael Hanson. The measures are set to come into force in January unless Congress delays them.