Tags: goldman | federal reserve | fed | economy | monetary policy | easing | recession

Goldman’s O’Neill: Fed May Have to Ease Further

By    |   Sunday, 29 Aug 2010 06:00 PM

 

If economic numbers continue to come in weak, the Federal Reserve will have to increase its quantitative easing program, says Jim O’Neill, chief economist at Goldman Sachs.

At its policy meeting Aug. 10, the Fed announced that it will purchase Treasuries with the proceeds of maturing mortgage securities. The idea is to avoid letting the Fed’s securities portfolio drop below the current level of $2.05 trillion.

But economic data have continued to sag since then. The latest bad news was a 12 percent drop in new home sales in July from June, pushing the sales rate to at least a 47-year low.

So the Fed may have to expand its qualitative easing to prevent the economy from falling back into recession.

“If we carry on with data like this, yes, it’s coming,” O’Neill told Bloomberg.

“September might be a little bit soon, but by October I would say for sure if the data carries on being as disappointing as it’s been.”

Quantitative easing helps the economy because the money the Fed uses to purchases its securities circulates through the banking system.

Raghuram Rajan, ex-chief economist of the International Monetary Fund, believes the Fed should start thinking about reversing its easing rather than increasing it.

“As ... we return to expecting steady but slow growth, we should not wait for employment to come back substantially before we start the process of raising rates,” he wrote on nytimes.com

 

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