US Fed under pressure to add to economic stimulus

 

The US Federal Reserve will discuss its options today for rebooting the recovery of the world's largest economy, in the teeth of a debt crisis on both sides of the Atlantic and stalling business and consumer confidence.

The central bank ended its second round of quantitative easing six weeks ago, only to find that economic growth has stalled again, leading some market players to predict more monetary policy easing.

However, economists doubt today's discussion by the Fed's interest rate-setting Federal Open Market Committee will result in any new promise to act, at least for the time being.

Kevin Logan, the chief US economist at HSBC, said higher inflation and expectations for inflation this year had raised the stakes. "Last year, the gate was wide open, but now they will have to be more cautious," he warned. "Even though things are tumultuous, they will be hopeful things get a little better and save their ammunition in case they get a little worse."

The Fed has kept official US interest rates at zero since December 2008 and has sought alternative tools to push market interest rates lower, too. In its second round of quantitative easing, known as QE2, it bought $600bn of US government bonds over eight months to the end of June. Options on the table today include replacing some of the short-term bonds it has bought with longer-dated debt, in the hope of putting extra downward pressure on long-term rates that affect borrowing costs for homebuyers in particular.

Other options include cutting the 0.25 per cent interest the Fed pays on private sector bank reserves, making it more likely that the banks will choose to lend the money to businesses and consumers. The Fed could also promise to keep official interest rates low for a fixed period.

The US economy grew at an annualised rate of just 0.4 per cent in the first quarter of this year.

Comments