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Report: Fed Ready to Downgrade US Outlook

Monday, 09 Aug 2010 07:29 AM

The Federal Reserve reportedly is poised to downgrade its assessment of the U.S. economic outlook amid weak economic data and rising fears of a double-dip recession.

The Federal Open Market Committee will signal greater concern about the economy, even as it is unlikely to agree to take major, new steps to boost growth, according to a report by the Financial Times, which didn't identify sources.

Despite the most aggressive rate-cutting campaign in the central bank's history and Fed purchases of nearly $1.5 trillion in mortgage and Treasury bonds, U.S. growth prospects still look shaky.

Fed Chairman Ben Bernanke has said the U.S. central bank could take steps to further ease monetary policy if the recovery were to falter.

Investors around the world will scour the U.S. central bank's policy statement this week for clues, however cryptic, that the Fed is ready to add fresh impetus to its unorthodox approach to lowering borrowing costs.

Any hints of further policy easing could have big implications for global financial markets, potentially providing a catalyst for renewed selling of the U.S. dollar and at least a temporary boost to stock prices around the world.

"The FOMC will have to tone down its assessment of the economy in view of recent weak indicators on real growth, real consumption spending and employment," Brian Bethune and Nigel Gault, economists at Global Insight, told the FT.

However, the FT said a plan to reinvest proceeds from maturing mortgage-backed securities may be approved.

Smaller measures to help the economy could initially take the form of a decision to reinvest proceeds from maturing mortgage-backed securities held by the U.S. central bank, thereby preventing the Fed's balance sheet from shrinking naturally, the FT reported.

"Given how low inflation already is, and given the potential for the recovery to falter, we expect Fed officials will highlight downside risks and signal a bias to ease in the FOMC statement," said Jim O'Sullivan, chief economist at MF Global.

Meanwhile, some experts expect a second bout of quantitative easing designed to kick-start the economy to prevent it sinking back into another period of negative growth, the U.K. Telegraph reported.

Paul Sheard, Nomura's chief global economist, was the first Wall Street economist to argue that Bernanke and his nine FOMC colleagues should take some form of affirmative action to get the U.S. recovery back on track.

Sheard, in a note published a week ago, argued that the most likely action is for the Fed to "at least stop the passive contraction of its balance sheet," the Telegraph reported.

His comments followed those of James Bullard, president of the St Louis Federal Reserve and a voting member of the FOMC, who said the central bank needs some form of quantitative easing plan.

David Rosenberg, chief economist at Gluskin Sheff and one of the earliest economists to make the deflation "call," noted that "there is growing chatter that the Fed is once again going to come to the rescue."

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The Federal Reserve reportedly is poised to downgrade its assessment of the U.S. economic outlook amid weak economic data and rising fears of a double-dip recession. The Federal Open Market Committee will signal greater concern about the economy, even as it is unlikely to...
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2010-29-09
 

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