Fed's stimulus impact 'may be modest' - IMF

Thursday 04 November 2010 16.22
Ben Bernanke - $600 billion bid to boost economy
Ben Bernanke - $600 billion bid to boost economy

The impact of the Federal Reserve's new move to boost a weak US economic recovery 'may be modest,' a spokeswoman for the International Monetary Fund said today.

'We believe that this action shows the Fed's commitment to supporting the economy, the recovery, and in particular to avoiding the risk of long-term deflation, or a lowering of long-term inflation expectations,' IMF spokeswoman Caroline Atkinson said.

'And we expect that it will have a positive impact on the economy although that may be modest,' she added.

The Fed announced last night that it will pump an additional $600 billion into the economy until the middle of next year to help lower long-term interest rates in hopes of spurring consumer spending that drives nearly 70% of US growth.

The IMF's chief economist, Olivier Blanchard, earlier today described the Fed's move, known as quantitative easing, as 'courageous'.

Blanchard said the measure had never been tried on that scale, and its impact and whether it will have positive effects was unknown.

US unemployment benefits resume upward climb

Official figures show that new claims for US unemployment benefits resumed their upward climb last week, with a stronger than expected surge.

Initial jobless claims rose to 457,000 in the week ending October 30, the Labor Department reported. This was an increase of 4.6% from the previous week when they had fallen close to the year's low reached on July 10. The increase surpassed the average analyst forecast of 445,000 new claims.

Since July 10, the weekly number has had almost the same number of weeks showing gains as declines.

The Labor Department is to report October employment figures on Friday. According to economists' forecasts, the US economy created 60,000 jobs in the month and the unemployment rate was unchanged at 9.6% for the third consecutive month.

Last night, the Federal Reserve announced it would pump an additional $600 billion into the economy to boost a recovery too weak to make a dent in high unemployment.

The decision takes the Fed into largely uncharted waters and is aimed at further lowering borrowing costs for consumers and businesses still suffering in the aftermath of the worst recession since the Great Depression.

The Fed said it would buy about $75 billion in longer-term Treasury bonds every month until the end of June 2011 and could adjust purchases depending on the strength of the recovery.

Critics within and outside the bank fear the Fed's policy will lead to high inflation and worry that low interest rates in the US risk fuelling asset bubbles in other countries and destabilising currencies.

But with the US economy expanding at only a 2% annual pace in the third quarter of this year and the jobless rate seemingly stuck around 9.6%, the Fed had come under pressure to do more to stimulate business activity.

At the Fed's post-meeting statement, policymakers described the economy as 'slow' and said employers remained reluctant to create jobs. They also called inflation 'somewhat low'.

'Progress toward our objectives has been disappointingly slow,' the Fed said, referring to its dual mandate to maintain price stability and foster maximum sustainable employment.