Tags: Fed | Ease | Policy | Economy

Goldman’s Hatzius: Fed to Ease Monetary Policy to Jolt Economy

Tuesday, 19 Jun 2012 07:47 AM

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The Federal Reserve will wrap up a monetary policy meeting on Wednesday and will likely announce a decision to stimulate the economy via monetary easing measures, says Goldman Sachs Chief U.S. Economist Jan Hatzius.

A weak labor market and an escalating European debt crisis are severe enough to prompt monetary authorities to decide they must intervene to rescue the economy.

Widespread market calls see the Fed extending a $400 billion stimulus program known as Operation Twist, under which the Fed sells short-dated Treasury securities and stocks up on longer-dated Treasury instruments with the aim of pushing long-term interest rates down.

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

That won't work, Hatzius says, adding the Fed will likely announce its resorting to a more drastic move known as quantitative easing, which are direct bond buybacks from banks designed to inject liquidity into the economy and steer the country away from deflationary decline and rising jobless rates.

"We would be quite surprised if we saw no easing this week,” Hatzius writes in a report, according to CNBC.

"We believe that an extension of Operation Twist could well be insufficient on its own and could thus be followed by additional easing action before long,” Hatzius adds.

Since the downturn, the Fed has rolled out two rounds of quantitative easing (QE) with the aim of spurring recovery.

QE1 saw the Fed buy $1.7 trillion in assets from banks, mainly mortgage securities, while QE2 saw the central bank snap up $600 billion of Treasury bonds, the latter of which wrapped up on June 30, 2011.

The move, also called balance-sheet expansion, aims to push long-term interest rates lower and encourage investment and hiring.

Unlike Operation Twist, quantitative easing expands the central bank's balance sheet, meaning the monetary authority is arguably printing money out of thin air.

Critics say the policy plants the seeds for inflation down the road, though Hatzius disagrees.

"The risk of inflation is remote, and even when it becomes less remote Fed officials should be easily able to tighten policy sufficiently," Hatzius wrote.

Some experts say the Fed may hold off on intervening thanks to market-friendly election results in Greece, where voters pushed the conservative New Democracy political party into power, which favors sticking with the euro.

Gasoline prices have fallen, which gives consumers more money to spend and drive recovery.

Furthermore, the European debt crisis has sent global investors racing to the safety of U.S. Treasury notes, which is pushing interest rates down in itself and may be doing the work for the Federal Reserve, making intervention less necessary — for now.

"I think the Fed will be in a wait-and-watch posture," says David Jones, chief economist at DMJ Advisors, according to the Associated Press.

"I think the odds still favor a third round of bond buying, but the June meeting will be too soon for the Fed to make that decision."

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans



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