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August 09, 2010 – Comments (2)

Goldman: Fed may stimulate economy by ‘unconventional' means

Published Monday August 9, 2010

Bloomberg News

http://www.omaha.com/article/20100809/MONEY/708099961

The Federal Reserve may return to “unconventional” monetary stimulus as early as this week's policy meeting as the U.S. economy continues to lose momentum, according to Goldman Sachs.

The firm has lowered its forecasts for gross domestic product and raised its estimate for the jobless rate as growth slows and the “reacceleration in U.S. output” expected for 2011 is made more doubtful by “heighted congressional resistance” to additional fiscal stimulus, Goldman said.

The Fed is likely to begin by reinvesting proceeds from maturing securities in its existing portfolio of mortgage-backed debt in other debt instruments, Goldman economists said. The measures could also include asset purchases, such as Treasuries, or a more “ironclad” commitment to low short-term policy rates, Goldman said. The central bank's policy-setting open market committee meets Tuesday in Washington.

“This would be a ‘baby step' in the direction of renewed unconventional easing, although it would probably be packaged as a decision to prevent a gradual tightening of the overall stance,” said analysts led by chief U.S. economist Jan Hatzius in New York.

Policymakers bought $1.7 trillion worth of mortgage and government debt from March 2009 through March of this year to keep borrowing costs low while the economy recovered from the worst recession since the 1930s. Should the central bank decide to resume purchasing fixed-income securities it would buy “at least $1 trillion,” they said.

Goldman lowered its forecast for economic growth in 2011 to 1.9 percent from 2.4 percent and predicted that the unemployment rate will return to 10 percent by early next year and remain at that level for the balance of the year.

Employers eliminated 131,000 jobs in July after a revised reduction of 221,000 the previous month, the Labor Department said last week. The median forecast of 84 economists in a Bloomberg News survey was for a reduction of 65,000. The jobless rate stayed at 9.5 percent.