Thursday 8 September 2011
Three Ex-Fed Chance Of New US Recession 20%-40%
Three former top Fed officials see 20%-40% chance of new US recession
1.Former top Fed officials signal support for QE3 if inflation slows
2.Fed's former deputy Kohn says central bank has limited options to lift economy
3.Former fed officials Madigan, Reinhart see zero rates until mid-2012
The U.S. economy faces a risk of falling back into recession and the Federal Reserve might need to consider a new round of securities purchases to deal with it, even though it isn't in a strong position to address a slowdown, three former top officials at the central bank said.
In an exclusive interview this week with The Wall Street Journal, Donald Kohn, Vincent Reinhart and Brian Madigan--the last three directors of the Fed's powerful monetary affairs division--put the risk of a new economic contraction at between 20% and 40%. Madigan and Kohn said the Fed should consider a third round of bond purchases only if inflation slows from recent elevated levels and if the economy continues to underperform. But they cautioned a new purchase program, dubbed QE3 for a third round of quantitative easing, wouldn't represent a cure-all.
Madigan, who advises Barclays Capital and teaches at Georgetown University after retiring from the central bank a year ago, said the Fed's $600 billion bond purchases that ended in June had a "relatively modest" positive effect on the economy. "Purchases of that order of magnitude could be helpful at the margin," he said in his first public interview since leaving the key position at the Fed.
Kohn was the most optimistic, saying the odds of a new recession following the severe downturn of 2008 and 2009 stood around 20%. Kohn, the Fed's No. 2 official until September 2010, said he still believes the economic slowdown in the first half was mainly due to temporary factors such as high food and gasoline prices and the impact of Japan's earthquake on the global supply chain. But even he is starting to lose faith in the idea that temporary factors are behind it.
Fears that a new recession may be around the corner are hitting global financial markets. U.S. consumers cut spending in June at the fastest pace in nearly two years, raising concerns that the economy is stalling largely because of underlying weakness following the financial crisis, not one-off factors. Economists have started to downgrade their forecasts for faster growth in the second half, after gross domestic product rose by less than 1% in the first six months of the year.
Kohn said the Fed still has some options to support the economy, but "they're kind of limited." He said he expects the central bank, which holds a policy meeting Aug. 9, to wait and see whether the recovery is really losing steam before taking any action. If that is the case--and inflation is coming down-- then he would give "very serious consideration" to a new round of bond purchases, he said.
The ex-officials all cautioned a new purchase program wouldn't represent a cure-all, "but in those circumstances, I think it's up to the central bank to do what it can to help around the edges," said Kohn, now a scholar at the Brookings Institution.
The bond purchases can help the economy by keeping borrowing rates, which are tied to U.S. Treasurys, low and by driving investors to riskier assets such as stocks. But the purchases have been attacked by Republicans at home and foreign government officials for fear they will spark runaway inflation and could lead the U.S. dollar to lose too much value.
Fed Chairman Ben Bernanke told Congress last month that he is prepared to act if economic weakness persists. But he also has signaled that, in order to buy more bonds, the Fed must see a risk of deflation. Though there have been hints that consumer prices are cooling off, many measures of inflation remain above the Fed's informal target of close to 2.0%.
The U.S. government's jobs report for July, to be released Friday, is expected to show the unemployment rate to have remained at a lofty 9.2%. Total nonfarm payrolls are forecast to have increased by only 75,000 last month, with continued layoffs seen in state and local governments.
While relieved that a government default was avoided, the former Fed officials were critical of a deal approved by Congress on Tuesday that allows the government to borrow more now in exchange for budget-deficit cuts of as much as $2.4 trillion over the next decade.
Reinhart, who said he gives Congress "a very low grade" like most Americans, believes the odds of a credit downgrade by rating companies haven't changed following the debt deal. Standard & Poor's was looking for 10-year budget cuts of $4.0 trillion to confirm the U.S.'s top-notch AAA rating.
1.Former top Fed officials signal support for QE3 if inflation slows
2.Fed's former deputy Kohn says central bank has limited options to lift economy
3.Former fed officials Madigan, Reinhart see zero rates until mid-2012
The U.S. economy faces a risk of falling back into recession and the Federal Reserve might need to consider a new round of securities purchases to deal with it, even though it isn't in a strong position to address a slowdown, three former top officials at the central bank said.
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| US recession |
Madigan, who advises Barclays Capital and teaches at Georgetown University after retiring from the central bank a year ago, said the Fed's $600 billion bond purchases that ended in June had a "relatively modest" positive effect on the economy. "Purchases of that order of magnitude could be helpful at the margin," he said in his first public interview since leaving the key position at the Fed.
Kohn was the most optimistic, saying the odds of a new recession following the severe downturn of 2008 and 2009 stood around 20%. Kohn, the Fed's No. 2 official until September 2010, said he still believes the economic slowdown in the first half was mainly due to temporary factors such as high food and gasoline prices and the impact of Japan's earthquake on the global supply chain. But even he is starting to lose faith in the idea that temporary factors are behind it.
Fears that a new recession may be around the corner are hitting global financial markets. U.S. consumers cut spending in June at the fastest pace in nearly two years, raising concerns that the economy is stalling largely because of underlying weakness following the financial crisis, not one-off factors. Economists have started to downgrade their forecasts for faster growth in the second half, after gross domestic product rose by less than 1% in the first six months of the year.
Kohn said the Fed still has some options to support the economy, but "they're kind of limited." He said he expects the central bank, which holds a policy meeting Aug. 9, to wait and see whether the recovery is really losing steam before taking any action. If that is the case--and inflation is coming down-- then he would give "very serious consideration" to a new round of bond purchases, he said.
The ex-officials all cautioned a new purchase program wouldn't represent a cure-all, "but in those circumstances, I think it's up to the central bank to do what it can to help around the edges," said Kohn, now a scholar at the Brookings Institution.
The bond purchases can help the economy by keeping borrowing rates, which are tied to U.S. Treasurys, low and by driving investors to riskier assets such as stocks. But the purchases have been attacked by Republicans at home and foreign government officials for fear they will spark runaway inflation and could lead the U.S. dollar to lose too much value.
Fed Chairman Ben Bernanke told Congress last month that he is prepared to act if economic weakness persists. But he also has signaled that, in order to buy more bonds, the Fed must see a risk of deflation. Though there have been hints that consumer prices are cooling off, many measures of inflation remain above the Fed's informal target of close to 2.0%.
The U.S. government's jobs report for July, to be released Friday, is expected to show the unemployment rate to have remained at a lofty 9.2%. Total nonfarm payrolls are forecast to have increased by only 75,000 last month, with continued layoffs seen in state and local governments.
While relieved that a government default was avoided, the former Fed officials were critical of a deal approved by Congress on Tuesday that allows the government to borrow more now in exchange for budget-deficit cuts of as much as $2.4 trillion over the next decade.
Reinhart, who said he gives Congress "a very low grade" like most Americans, believes the odds of a credit downgrade by rating companies haven't changed following the debt deal. Standard & Poor's was looking for 10-year budget cuts of $4.0 trillion to confirm the U.S.'s top-notch AAA rating.
