USA Could Be Forced Into Another Trillion Dollar Bank Rescue

The U.S. economic recovery has lost so momentum that the Federal Reserve reportedly will be forced to return to “unconventional” monetary easing, which could result in a $1 trillion emergency rescue, as early as next week.

“The jobs report has most likely fueled a vigorous debate among FED officials on whether more easing is needed to bolster the recovery.”

Goldman Sachs, whose economists recently cut their forecasts for US economic growth in 2011, says  these measures could involve more asset purchases, such as Treasuries, or a more “ironclad” commitment to low short-term policy rates. If the FED committee decides on more asset purchases, the amount would be at least $1 trillion, Bloomberg reports.

Goldman expects the FED to announce that it will reinvest proceeds from the paydown of mortgage-backed securities in the bond market at next week’s policy meeting.

The Federal Reserve’s Open Markets Committee (FOMC) meets Tuesday.

FED Chairman Ben Bernanke has said the US central bank could take steps to further ease monetary policy if the recovery were to falter.

Meanwhile, Goldman economists says they still expect growth in real gross domestic product to average 1.5 percent at an annual rate in the second half of this year, MarketWatch writes.

US economic growth slowed to a 2,4% annual rate in the second quarter after expanding at a 3,7% pace in the first three months of this year.

Remarkable Changes

The latest Goldman analysis  follows some rather defensive statements from chairman Ben Bernanke lately, and a quite stunning article by the St. Louis FED chief, published last week.

See: Helicopter Ben; Cleared For Take Off

Now, the Goldman economists also see a more gradual pickup, but not until the end of next year.

The US GDP is likely to average 1.9 percent in 2011 compared with a previous forecast of 2.5 percent, largely due to Congressional resistance to extending fiscal stimulus, according to MarketWatch.

Friday, private employers added fewer workers to their payrolls in July than expected and hiring in June was much weaker than had been thought, a big blow to an already feeble economic recovery.

The jobs report has most likely fueled a vigorous debate among FED officials on whether more easing is needed to bolster the recovery and avoid a drop in consumer prices that could further sap the economy, writes.

“The labor market improvement has slowed to a glacial pace, consistent with third-quarter growth even slower than the second,” says Nigel Gault, chief US economist at IHS Global Insight, according to Reuters.

“It doesn’t look like a double-dip, but it looks like very weak growth.”

Reconsider, Reinvest, Re-Something!

Other analysts speculated the FED would steer away from lowering the interest rate it pays on bank reserves.

“I continue to believe that they will state they will reinvest the runoff from all of their present securities to insure that there is no passive tightening,” Brian Fabbri, chief North America economist at BNP Paribas says.

However, economist Paul Ashworth, of Capital Economics, believe the FOMC should shy away from further major policy stimulus, the UK Telegraph reports.

“FED officials would need to see evidence of a much more severe deceleration in economic growth before they would be willing to countenance any meaningful expansion of quantitative easing,” he says.

Letest from CNBC: Discussing the changes the FED needs to make in monetary policy, with Lyle Gramley, former FED governor president and William Ford, former Atlanta FED president:

Vodpod videos no longer available.


And here’s a copy of the Goldman analysis: “Climbing Aboard QE2 to Avoid a Double Dip?”

“Although it is a close call, we expect the FOMC to take a “baby step” in this direction at next week’s meeting by deciding to reinvest MBS paydowns in US Treasuries. Later measures would include a stronger commitment to keep rates low and/or asset purchases of at least $1 trillion, most likely also in Treasuries.”

Related by the Econotwist:

Mr. Rubin’s Still Rockin’ The House

Meredith Whitney: Even More Bearish On Housing And Financials

A European Revolution by December?

A Report To Make You Go “Hmmm…”

Will Basel III Crush the Global Economy?

Helicopter Ben; Cleared For Take Off

US Congress Question Morals of Monetary Policy

The Failure Of A Culture

EU: Trading Bailouts For Weapons

Jim Rogers Says CNBC Is A PR Agency

Fitch: Banks Need More Capital Than Stress Test Shows


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Filed under International Econnomic Politics, National Economic Politics