OECD Backs Fed's Much-Criticized Easing Plan

Thursday, 18 Nov 2010 10:28 AM

 

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The OECD gave its blessing to the U.S. Federal Reserve's ultra-loose monetary policy on Thursday, dismissing criticism the central bank's asset-buying spree spawned inflation or asset bubbles.

In its economic outlook, the Organization for Economic Cooperation and Development said another round of Fed asset purchases would be warranted if the recovery sputters.

The Fed has drawn worldwide rebuke over its latest plan to buy $600 billion in governments bonds to try to spur a speedier recovery.

Critics contend the easy money stance weakens the dollar and sends an inflationary wave of investor cash into emerging markets, without doing much to bolster U.S. growth.

"If growth turns out to be significantly weaker than projected, action to lower real long-term rates via further quantitative easing would be justified, notwithstanding uncertainties associated with the use of such unconventional policy tools," the OECD said.

In a briefing for U.S. journalists in Washington, OECD officials acknowledged the Fed was wading into uncharted waters, and there was a risk of diminishing returns. But they said it was still necessary because the United States was running out of fiscal room to support growth.

The recovery, which began in June 2009, was largely driven by policy support and it was "unclear if output growth is yet self-sustaining," the OECD's report said.

Outside of certain commodities which it did not name, the OECD said there was little sign extraordinarily loose policy settings were unanchoring inflation expectations or blowing up asset price bubbles.

However, it said the risk of trouble rises the longer it takes to get monetary policy back to normal.

The Fed has kept its benchmark rate near zero for almost two years, and many economists think it will stay there for another year or more.

The OECD's forecasts show the Fed falling short of its twin goals of full employment and price stability despite the asset-buying plans. It said the jobless rate will fall only slowly, dipping to 8.7 percent by 2012 from 9.6 percent now.

OECD projected the consumer price index would hover around 1.1 percent through 2012, which would be well below normal.

"With substantial slack in the economy, low levels of inflation and subdued bank lending, monetary policy should remain very accommodative for the next few years and be withdrawn only as the economy recovers," it said.

The OECD also said the Fed might want to adopt an explicit medium-term inflation target, a controversial idea that has been debated within the central bank in recent months.

As for Canada, the OECD said the recovery had slowed sharply and growth would probably be moderate through 2012.

Barring a further downturn in labor market conditions, the government should begin withdrawing stimulus and reducing structural deficits, as planned, over the course of 2011 and 2012, it said.

The Bank of Canada, however, should "delay further rate hikes until early 2011 when a recovery in private demand is expected to gain firmer traction, after which a gradual pace of tightening would be appropriate."

© 2014 Thomson/Reuters. All rights reserved.

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