THE US Federal Reserve yesterday took a symbolic first step to extend its crisis-era monetary policy regime, as it downgraded its view of the economic outlook amid rising fears that the US could face a “double-dip” recession.
Meeting in Washington, the US central bank yesterday announced the extension of extraordinary policy measures in place since early in the financial crisis. These are aimed at preventing a stalling of that country’s economy.
The policymakers agreed to begin reinvesting proceeds from expiring mortgage-backed securities in long-term Treasuries, thereby putting the shrinkage of the $2,300 billion (€1,743 billion) balance sheet the US central bank built up during the recession on ice.
The move signals a significant shift in thinking at the Fed, which only a few months ago was tilting towards tightening monetary policy in order to fend off inflation as the economic recovery gathered strength.
Fed officials significantly downgraded their economic outlook, saying the “pace of recovery in output and employment has slowed in recent months” and was likely to be “more modest” than anticipated in the near term.
When the Federal Open Market Committee last met in June, it said the economic recovery was “proceeding” and was likely to advance at a “moderate” pace.
Recent economic news from the US has pointed to renewed feebleness, with employment, housing and output measures weakening or falling below earlier expectations. Low and falling underlying inflation has added to concerns that the US could be at risk of becoming locked into a protracted, Japan-style period of deflation and stagnation.
These developments had prompted the Federal Reserve Bank to flag in recent weeks that it would act at its monthly scheduled meeting yesterday. The bank’s head, Ben Bernanke, last month told a committee of the US federal parliament that the economy faced a period of “unusual uncertainty” and that he was prepared “to take further policy actions as needed”.
In a 9-1 vote, the policy-making committee of the bank decided formally to suspend the gradual withdrawal of monetary stimulus via “quantitative easing”, or QE. QE involves a central bank creating money by buying assets, such as bonds and shares. An increase in the supply of money drives down its price (the interest rate). Lower interest rates encourage spending and borrowing and discourage saving. Both stimulate economic activity in the short term.
The Fed will use the proceeds generated from maturing assets it bought when it began QE last year to buy others. It appeared to signal a shift in the types of assets it wishes to hold, with government bonds being mentioned as targets for new purchase.
The US is Ireland’s single most important economic partner when both exports and inward investment are considered.
Any return to recession in the States would almost inevitably have serious repercussions for the Irish economy and its prospects for recovery. Although the continuation of the QE programme in the US is not without risks – all of which are difficult to measure – from an Irish perspective anything that halts a slide back into recession in the US lessens the chances of a further downward lurch in this economy.
The Fed kept interest rates at their current target range of 0-0.25 per cent, and maintained its pledge to hold them there for an “extended period”.– (Additional reporting Copyright The Financial Times Limited 2010)
