Tags: Fed | easing | 1940 census | hatzius

Goldman's Hatzius: Quantitative Easing is Still on Fed's Radar Screen

Tuesday, 03 April 2012 02:38 PM

The Federal Reserve will likely still consider rolling out a third round of quantitative easing — a technical term for flooding the economy with liquidity to stave off deflationary pressures — or some other loose monetary policy tool this year despite improving economic indicators, says Jan Hatzius, chief economist at Goldman Sachs.

The Fed has rolled out two rounds of quantitative easing since the downturn, swelling its balance sheet by well over $2 trillion buying assets like Treasury bonds and mortgage-backed securities from banks with the aim of encouraging hiring and stabilizing prices.

Critics say the move is just printing money out of thin air and will push up inflationary pressures down the road.

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

"I think there will be some discussion about it. I think the staff will have probably presented something on the various options that are out there," Hatzius tells CNBC.

Aside from a third round of quantitative easing, the Fed could extend a policy of selling short-term Treasury instruments from its portfolio and stocking up more on longer-term instruments in order to jolt the economy, Hatzius adds.

While such a move, dubbed Operation Twist by the markets, doesn't swell the balance sheet like quantitative easing does, it does help push long-term interest rates down.

Another method of stimulating the economy could come through so-called sterilized quantitative easing, where the Fed purchases more assets from banks like in the past but with money floating around elsewhere in the economy.

The possibility of such measures, which tend to send stock prices rising and the dollar weakening, will diminish in June, when Federal Reserve officials will meet to assess monetary policy, Hatzius says.

"After June the probability goes down. June is the time that Operation Twist is scheduled to end, and that's a natural time to decide whether you want to have a successive program," he says.

"Our baseline is still that we will see something in the second quarter by the June meeting."

While senior Fed officials have said the Fed should take a wait-and-see approach on the matter, Fed Chairman Ben Bernanke has said he cannot rule out anything.

"Further significant improvements in the unemployment rate will likely require a more rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies," Bernanke said recently.

Fed officials are still concerned over whether the economy can continue its pace of recovery without their intervention, Hatzius says.

"I think the Fed would like to see the economy growing more strongly," Hatzius says.

"They're encouraged by the improvements in the labor market they've seen but they want to keep them going. And they're concerned if the economy doesn't accelerate and GDP growth doesn't pick up from here, that maybe we'll see a slowdown in the pace of those gains."

The country's gross domestic product grew 3 percent in the fourth quarter although concerns persist it could slow this year.

Some blame the White House for tepid recovery.

Economies normally snap back when recovering from recessions, but that hasn't been the case this time around thanks in part to excessive regulations and taxes slapped on businesses by the Obama administration, says Edward Lazear, chairman of the President's Council of Economic Advisers from 2006 to 2009 and Stanford professor.

From 1947 to 2007, the average annual growth rate for the U.S. was 3.4 percent, Lazear writes in a Wall Street Journal opinion piece.

Since the recovery began from the Great Recession, growth has averaged 2.4 percent, Lazear adds, citing National Bureau of Economic Research data.

Unemployment stands at 8.3 percent, well above pre-recession levels and many companies refuse to hire based on a lack of demand and on economic and regulatory uncertainty.

"Threats of higher taxes, the constantly increasing regulatory burden, the failure to pursue an aggressive trade policy that will open markets to U.S. exports, and the enormous increase in government spending all are growth impediments," Lazear writes.

"Policies have focused on short-run changes and gimmicks — recall cash for clunkers and first-time home buyer credits — rather than on creating conditions that are favorable to investment that raise productivity and wages."

One snag hurting economic recovery has been workforce mobility.

Often individuals or families in the U.S. are willing to pick up and move across the country in search of work, but many cannot since they owe more on their homes than they are worth or do not have the updated skills needed to land a job after being out of work for so long.

The percentage of people who changed residences between 2010 and 2011 came to 11.6 percent, the lowest recorded rate since a Current Population Survey began collecting statistics on the movement of people in the United States in 1948, according to U.S. Census Bureau data.

The rate hit 20.2 percent in 1985.

Meanwhile, the country today is showing a little nostalgia for its recession-era past, when families packed up and headed out in search of better times.

Interest in newly released 1940 U.S. Census information has been so hot that users flocking to the National Archives web page to learn more about their family history have paralyzed the site just after the records went public for the first time.

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

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