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Updated: November 1, 2010 09:26 IST

Fed expected to pump up to $1tn into U.S. economy

Phillip Inman
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Federal Reserve Chairman Ben Bernanke. File photo
AP
Federal Reserve Chairman Ben Bernanke. File photo

This would be in addition to the $1.7tn already spent, a move seen by stock markets as a way to lower long term borrowing costs and boost the earnings of corporations

Federal Reserve chairman Ben Bernanke is likely to push ahead with as much as $1tn in quantitative easing to spur growth and cut unemployment.

In a crucial week for the moribund U.S. economy, Mr. Bernanke will override doubters and inject funds into the banking system to boost lending and improve the outlook for national income growth and jobs.

The meeting of the Fed is one of four crucial conventions of central banks taking place this week as the Bank of England, European Central Bank and Bank of Japan all meet to discuss ways to boost flagging economies.

The decision by the Fed will probably set the tone for the others and President Barack Obama, trapped by the refusal of Republicans to sanction a fiscal boost to the economy, will cheer any move by the Fed to pour billions into the economy just few days ahead of the Congressional mid-term elections.

Most analysts said they expected the Fed to spend around $500bn, although there have been suggestion the stimulus could reach $1tn.

This would be in addition to the $1.7tn already spent, before considering further measures to boost the economy as it moves into 2011.

The Fed’s decision on Wednesday will also cheer stock markets, which see so-called quantitative easing (QE) as a way to lower long term borrowing costs and boost the earnings of corporations.

On Thursday the Bank of England could follow suit, though strong UK growth figures in the second and third quarters are likely to delay any move to ease monetary policy until at least the new year.

Mervyn King, the bank’s governor, is understood to be concerned at the underlying weakness of the UK economy. However, recent speeches by him and other monetary policy committee members have revealed signs of significant disagreement over the next move.

Poor figures today in the Markit survey of purchasing managers in the manufacturing industry and tomorrow’s survey of construction purchasing managers could influence the decision. The European Central Bank also meets on Thursday, while the Bank of Japan, nervous about its stuttering economy and the high value of the yen, has brought meetings forward to Thursday and Friday this week. Markets expect it to watch the Federal Reserve closely.

The economist Nouriel Roubini, nicknamed Dr. Doom for his predictions of the banking crash, warned last week that Mr. Obama is heading for a “fiscal train wreck”. He said: “Obama may take some comfort from the fact that the worst of the coming fiscal train wreck will be prevented by the Fed’s easing. But the risk is he will then preside not over a bout of inflation, but a Japanese-style stagnation, where growth is barely positive, and deflationary pressures and high unemployment linger.” Mr. Roubini, like many critics of U.S. government policy, points to a yawning output gap that meant in the second quarter, gross domestic product came to just 93.5% of potential GDP, leaving a large section of the economy idle.

U.S. third quarter GDP grew at an annualised 2%, spurred by business investment and spending by consumers on the high street. However, much of the growth came from stock building by companies rather than sales, while exports worsened. While the U.S. economy has grown in each of the past four quarters, unemployment has remained high, with the jobless rate stuck for the past two months at 9.6%. Housing investment was also a weak element in the last growth figures.

Owen James, an economist at the UK’s Centre for Economics and Business Research, said unlike the Bank of England, which targets inflation, the Fed’s mandate marries maximising employment while maintaining stable prices.

“Against both these measures the Fed is failing. Job creation is currently unable to keep pace with population growth and deflation remains a risk. As today’s figures show, the economy needs a boost.” Ian Harwood, chief economist at City firm Evolution Securities, was more optimistic about the U.S.

“Looking ahead, there remains no good reason to fear a U.S. double-dip. Leading indicators remain positive, profits continue to rise strongly year on year and, crucially, the gross imbalances which obtained prior to the 2008/09 downturn - a housing bubble; an over-extended consumer; a large non-financial corporate deficit - no longer exist.”

Copyright: Guardian News & Media 2010

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