The Federal Reserve governors appear divided about the meaning of certain economic trends. The Fed’s August 11-12 policy session was optimistic but tempered with caution. The minutes of the meeting indicated that Reserve members felt the risks to the economy had eased, but the trajectory of the recovery, inflation and deflation worries and effective interest rate changes remain tenuous factors that will determine the eventual “exit strategy.”
The minutes included the following analysis; “Meeting participants agreed that the incoming data and anecdotal evidence had strengthened their confidence that the downturn in economic activity was ending and that growth was likely to resume in the second half of the year.”
The consensus is that the current recovery will be modest and the chance that the recession will resemble a “W” rather than a “V’ is strong. As a result, the Federal Reserve has determined to stay the course on certain stimulus spending despite inflationary risks.
Al Dales of Capital Economics in Toronto offered the following observations; “The Fed is in no hurry to alter its current policy stance. The Fed will complete its asset-purchasing program and remains reluctant to withdraw its policy support soon.”
As of September 2, 2009, the Federal Reserve has bought $792 billion in mortgage-backed securities and $118.6 billion in mortgage agency debt in 2009 alone. Since the recession began in 2007, the Fed has total purchases of $1.25 trillion in mortgage-backed securities and $200 billion in mortgage agency debt. These programs are set to expire at the end of 2009. The central bank did take steps to wind down a $300 billion long term Treasury purchasing program.
Inflation WoesThe bottom line is that there is no quick fix for the economy, which entered the country’s deepest recession in December of 2007. In fact, the fed seems resolved that the recovery will be slow and prolonged. The central bank does not rule out the possibility of another downward spike and thus is hesitant to commit to an exit strategy preferring instead to extend certain stimulus investment.
Citing high unemployment and low manufacturing, the Fed does not fear inflation. However, in speaking with CNBC on Wednesday, Charles Plosser, the Chairman of the Philadelphia Federal Reserve, warned against a potential spike in inflation. Plosser believes that the Fed may have to raise its favorable interest rates sooner than anticipated.
Plosser provided evidence of a stronger than expected recovery at the end of 2009 and predicted bigger gains in 2010. At the August meeting, the Federal Reserve voted to keep benchmark overnight interest rates steady at near zero.
A new American phenomenon, household savings, has combined with the high unemployment and lack of consumer confidence to contain spending. The economy needs a loosening of the consumer’s pocketbooks to stabilize the recovery.
The OECD Weighs InEarly Thursday, the Organization of Economic Co-Operation and Development (OECD) predicted a stronger than expected recovery. OECD chief economist Jorgen Elmeskov said; “Compared with expectations a few months ago, we now have a recovery which may be coming a little earlier and it may be slightly stronger because financial conditions have improved more rapidly than we assumed a few months ago.”
The OECD predicted a 1.6% expansion of the U.S. economy in the third quarter and 2.4% in the fourth. These are substantial reversals of the OECD’s June projections.
The OECD also predicted third and fourth quarter improvements in the G-7 economies of 1.2% and 1.4% in the third and fourth quarters of 2009. Europe’s big winners appear to be Germany and France. Japan is expected to grow 1.1% in the third quarter.
Elmeskov cited a significant global reduction in unsold homes as a major contributing factor in the recovery. “In some countries, including the United States, it also looks as if the bottom of the housing market might have been hit a little earlier than assumed.”
The OECD urged economies to continue monitoring quantitative easing policies but to begin developing exit strategies that would include normalization of interest rates. These rates should begin to rise in the third quarter of 2010.
No comments:
Post a Comment