Wednesday, July 13, 2011

Fed sees 5-year exit from US crisis support

The Federal Reserve has set the guidelines
of an exit strategy from its extraordinary
support of the US economy
 © AFP/File Karen Bleier
AFP

WASHINGTON (AFP) - The Federal Reserve has set a gradual exit from crisis support of the US economy that could take up to five years, according to the minutes of its last policy meeting released Tuesday.

But with the economy still sluggish, the central bank's policy board remained divided on whether the country would need a new "QE3" stimulus program, the minutes showed.

Policymakers at the June 21-22 meeting of the Federal Open Market Committee, agreed that the Fed, "when economic conditions warrant," would begin to raise ultra-low interest rates and then slowly sell off billions of dollars in Treasury securities, originally bought up to inject liquidity into the economy, "over a period of three to five years," Participants said the measured pace of asset sales was aimed at minimizing the impact of the wind-down on credit conditions "across sectors of the economy."

The FOMC emphasized that it would weigh the timing and pace of the exit against its mandate to promote full employment and keep prices stable.


All but one of the participants agreed to the exit strategy plan.

Debt problems in the United States and Europe clouded the central bank's economic outlook.

With a Washington policy stalemate opening up the possibility of US debt default as early as August, participants emphasized "that even a short delay in the payment of principal or interest on the Treasury Department's debt obligations would likely cause severe market disruptions and could also have a lasting effect on US borrowing costs."

They also noted that Greece's fiscal difficulties and spreading concerns about other peripheral European countries "could cause significant financial strains in the United States."

"US money market mutual funds have significant exposures to financial institutions from core European countries, which, in turn, have substantial exposures to Greek sovereign debt," the minutes said.

At the June meeting, central bank policymakers discussed signs of a slowing US economic recovery, including a softening jobs market, stuttering industrial production, falling consumer spending and a depressed housing market.

The weaker economic factors led policymakers to downgrade their forecasts, released separately with the post-FOMC statement, and leave in place accommodative monetary policy.

The FOMC unanimously decided at the time to hold the federal funds rate between zero and 0.25 percent, end its $600-billion bond-buying program by June 30 and continue to reinvest its principal payments from security holdings.

The Fed has spent more than $2 trillion on mortgage securities and other assets to boost economic growth since the 2008 financial crisis.

But the minutes revealed FOMC policymakers were divided about the need for fresh support in the face of the sluggish recovery.

Some participants noted that if economic growth remained too slow to make "satisfactory" progress in reducing unemployment, and if inflation moved lower, "it would be appropriate to provide additional monetary policy accommodation."

Others saw slower growth and higher inflation as suggesting there was less slack in the economy than had been thought, while some said the exit may need to begin sooner than anticipated by financial markets, because of structural problems in the labor market.

Thomas Julien, US economist at Natixis, discounted prospects for another round of Fed bond purchases, known as quantitative easing.

"Even if a few members mentioned that the Fed should consider further monetary easing depending on the path of the recovery, the probability for a QE3 is pretty low and would be conditional to a significant deterioration of the outlook," Julien said.

© AFP -- Published at Activist Post with license



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