Tags: Goldman | sachs | Fed | Unconventional | Monetary | Easing

Report: Fed Could Be Forced Into $1 Trillion Emergency Rescue

By Frank McGuire   |   Friday, 06 Aug 2010 03:01 PM

The U.S. economic recovery has lost so much momentum that the Federal Reserve reportedly will be forced to return to “unconventional” monetary easing, which could soon result in a $1 trillion emergency rescue.

Goldman Sachs Group Inc., whose economists also cut their forecasts for U.S. economic growth in 2011, said these measures could involve more asset purchases, such as Treasuries, or a more “ironclad” commitment to low short-term policy rates, according to Bloomberg.

If the Fed committee decides on more asset purchases, the amount would be at least $1 trillion, Bloomberg reported.

Goldman expects the Fed to announce that it will reinvest proceeds from the paydown of mortgage-backed securities in the bond market at its policy meeting. The Federal Reserve's Open Markets Committee (FOMC) meets Tuesday.

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.

Meanwhile, Goldman economists said they still expect growth in real gross domestic product to average 1.5 percent at an annual rate in the second half of this year, according to MarketWatch.

U.S. economic growth slowed to a 2.4 percent annual rate in the second quarter after expanding at a 3.7 percent pace in the first three months of this year.

The Goldman economists see a more gradual pickup by the end of next year. GDP is likely to average 1.9 percent in 2011 compared with a previous forecast of 2.5 percent, largely due to Congressional resistance to extending fiscal stimulus, according to MarketWatch.

Friday, private employers added fewer workers to their payrolls in July than expected and hiring in June was much weaker than had been thought, a big blow to an already feeble economic recovery.

The jobs report has most likely fueled a vigorous debate among Fed officials on whether more easing is needed to bolster the recovery and avoid a drop in consumer prices that could further sap the economy.

"The labor market improvement has slowed to a glacial pace, consistent with third-quarter growth even slower than the second," said Nigel Gault, chief U.S. Economist at IHS Global Insight in Lexington, Mass., told Reuters. "It doesn't look like a double-dip, but it looks like very weak growth."

Other analysts speculated the Fed would steer away from lowering the interest rate it pays on bank reserves.

"I continue to believe that they will state they will reinvest the runoff from all of their present securities to insure that there is no passive tightening," Brian Fabbri, chief North America economist at BNP Paribas in New York, told Reuters.

However, economist Paul Ashworth, of Capital Economics, said the FOMC should shy away from further major policy stimulus, the U.K. Telegraph reported.

"Fed officials would need to see evidence of a much more severe deceleration in economic growth before they would be willing to countenance any meaningful expansion of quantitative easing," he said.

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The U.S. economic recovery has lost so much momentum that the Federal Reserve reportedly will be forced to return to unconventional monetary easing, which could soon result in a $1 trillion emergency rescue. Goldman Sachs Group Inc., whose economists also cut their...
Goldman,sachs,Fed,Unconventional,Monetary,Easing
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2010-01-06
 

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