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Bank of America Economists: Fed Will Stimulate the Economy in September

Thursday, 12 Jul 2012 11:36 AM

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The economy is cooling its already tepid pace of recovery and will likely receive a shot in the arm in the form of Federal Reserve stimulus in September, Bank of America economists conclude.

The Federal Reserve has said it remains ready to intervene in the economy should prices deflate and joblessness worsens, likely through a round of asset purchases from banks, a liquidity-injecting tool known as quantitative easing.

The Fed has rolled out two rounds of quantitative easing since the downturn, pumping $2.3 trillion into the economy in the process to stave off decline, though critics say the move is nothing more than printing money out of thin air that plants the seeds for inflation down the road.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

Expect a third round in September, Bank of American analysts says, after digesting the minutes of the Fed's June meeting of its rate-setting body, the Federal Open Market Committee (FOMC).

"The minutes from the June FOMC meeting revealed a larger number of Fed officials either favoring or willing to consider additional easing if conditions weaken," the bank's economists write in a note to clients.

"Members noted even greater uncertainty and risks skewed to the downside, suggesting that additional easing may occur sooner rather than later. We expect that the outlook will be weak enough to warrant addition Fed easing by the September 12-13 FOMC meeting; we look for Fed officials to both push out their forward guidance on rates until at least mid-2015 and to launch QE3."

Quantitative easing often stirs debate and fuels worries, as the tool is used to prop up the economy when more traditional monetary policy measures like interest rate cuts alone won't work.

Critics claim the sea of liquidity that comes with easing pumps up commodity prices and makes food and gasoline more expensive.

In the minutes from the Fed's June 19-20 monetary policy meeting, the Fed reveals that voting members favor stimulating the economy via easing measures but only if it deteriorates further.

In other words, monetary policy officials are sticking with a wait-and-see approach.

"A few members expressed the view that further policy stimulus likely would be necessary to promote satisfactory growth in employment and to ensure that the inflation rate would be at the Committee's goal," the Federal Reserve minutes read.

"Several others noted that additional policy action could be warranted if the economic recovery were to lose momentum, if the downside risks to the forecast became sufficiently pronounced, or if inflation seemed likely to run persistently below the Committee's longer-run objective" of 2 percent inflation rates.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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