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

Nov. 4, 2010 - PRLog -- "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," said IMF spokeswoman Caroline Atkinson.

"And we expect that it will have a positive impact on the economy although that may be modest."

The Fed announced Wednesday it will pump an additional 600 billion dollars into the economy until mid-2011 to help lower long-term interest rates in hopes of spurring consumer spending that drives nearly 70 percent of US growth.

The IMF's chief economist, Olivier Blanchard, earlier Thursday described the Fed's move as "courageous." The approach, known as quantitative easing, involves buying long-term Treasury bonds from banks.

Blanchard, in an interview on French radio Europe 1, said the measure had never been tried on that scale, and its impact and whether it will have positive effects was unknown.

In its World Economic Outlook report in October, the IMF said that given high unemployment in the United States, the Fed should continue to pursue a stimulative monetary policy but closely watch its impact on the dollar's exchange rate and interest rates.

While the Fed took similar measures during the 2008-2009 economic crisis and has rolled over those expiring purchases, the expanded spending is unprecedented when the economy is not teetering on the edge of collapse.

Fed chairman Ben Bernanke said the billions of dollars to be pumped into the financial system should help an economy that is struggling without igniting inflation.

Bernanke, in an opinion piece appearing in Thursday's Washington Post, said the Fed took these extraordinary steps because it has "a particular obligation to help promote increased employment and sustain price stability."

He said the measure was effective in helping the economy weather the economic crisis of 2008-2009.

"This approach eased financial conditions in the past and, so far, looks to be effective again," he wrote.

"Easier financial conditions will promote economic growth," he said.

"For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending," he said.

That, he said, "will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion."

The world's largest economy, which emerged from recession in July 2009, grew at a two percent annual rate in July-September, slightly more than a 1.7 percent expansion in the second quarter.

That tepid pace is considered too weak to generate job growth and bring down unemployment near 10 percent.

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