Signs of recovery as US to print $600bn
Published 04/11/2010 | 05:00
A SLEW of better economic data gave some signs that recent global weakening may be coming to an end -- just as the US Federal Reserve prepares to pump $600bn (€430bn) into the economy.
US figures yesterday showed:
> Private companies added 43,000 jobs in October -- twice as many as expected, offering a glimmer of hope ahead of the national jobs report on Friday.
- Orders placed with US factories climbed more than forecast in September, posting the biggest gain since January.
- Results from major credit card companies suggested consumers are spending at a rate not seen since before the financial crisis.
Announcing the decision to embark on more "quantitative easing" (QE), the Fed's Open Market Committee (FOMC) took a gloomy view of the world's largest economy.
"Currently, the unemployment rate is elevated and measures of underlying inflation are somewhat low, relative to levels that the committee judges to be consistent, over the longer run, with its dual mandate," the FOMC said.
"Progress toward its objectives has been disappointingly slow," it added.
Including US Treasury purchases from reinvesting proceeds of mortgage payments, the Fed will buy a total of $850-$900bn of securities by next June, the New York Fed said in an accompanying statement. Some analysts however, wondered whether the Fed was acting too late, when the economy may not need this scale of inflationary stimulus.
"The parallels are very close to 2003, when the Fed had a maximum degree of panic about deflation when inflation had already bottomed out and was about to pick up," said Stephen Stanley, chief economist at Pierpont Securities Stamford, Connecticut.
"The Fed inflation forecasts are going to be too low, and as a result policy is going to be very easy," he said.
Harvard University economist James Stock pointed to the reverse danger -- that any bad economic shocks could tip the US into "a deflationary trap".
"That is a terrible situation. But if the Fed takes too much action, we find ourselves with 2.5pc or 3pc inflation, and the economy really takes off."
A Bloomberg News survey of economists found them predicting that US growth was likely to accelerate to a 2.6pc annual pace by the second quarter of next year, from 2pc in the third quarter of 2010. Five of the 18 members of the FOMC have gone public with objections or doubts about the QE programme.
Only one, Kansas City Fed President Thomas Hoenig, has a vote this year and he cast his seventh straight dissenting vote.
"The risks of additional securities purchases outweighed the benefits," and the "continued high level of monetary accommodation" may eventually "destabilise the economy", the statement said on his position.
Some analysts have warned that the dollar "printing" may not achieve the expected results.
"The side issue in all of this is whether it will do any good," said Rob Carnell, chief international economist at ING.
"There is an implicit assumption that QE will ultimately provide a boost to the real economy, either by boosting lending, or spending, or lowering borrowing rates -- none of which there is much evidence for." (Bloomberg)