Tags: Goldman | Hatzius | Monetary | Cliff

Goldman's Hatzius Posits a 'Monetary Cliff'

By    |   Thursday, 21 June 2012 10:19 AM

The U.S. economy faces a monetary cliff in addition to a much-heralded fiscal cliff, says Goldman Sachs economist Jan Hatzius.

The fiscal cliff refers to the end of the Bush tax cuts and across-the-board mandatory spending cuts scheduled take effect at the start of 2013. Many economists say that so-called cliff will send the economy into a recession.

The monetary cliff, a term Hatzius coined, is the end of the Federal Reserve's loose monetary policy, Hatzius wrote in a note to clients, according to CNBC.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

As expected, the Fed this week extended its Operation Twist, a program in which it sells short-term Treasuries and buys long-term Treasuries in an effort to drive down long-term rates, through the end of the year.

The end of Operation Twist and the Fed's decision not to explicitly extend is low-rate guidance creates a monetary cliff, Hatzius writes, according to CNCB.

Slow growth and high unemployment over 8 percent will continue to plague the U.S. economy into 2013, Hatzius predicts. GDP growth will fall to 1.5 percent in the first quarter of next year.

However, the Fed may again start purchasing large amount of assets, he notes.

The Fed has struggled to make a significant dent in the unemployment rate and its Operation Twist has had only a modest impact on interest rates, according to The Washington Post. In six months, the program reduced rates by 15 or 20 cents for every $100 borrowed, which amounts to a $600 yearly savings on a $300,000 mortgage.

And it might have even less impact this time, the Post predicts.

Reducing long-term rates such as mortgage rates is supposed to stimulate the economy by giving consumers more spending money. However, many homeowners cannot refinance because they lack home equity or their credit scores do not meet lenders' requirements, the Post notes.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

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