US economic recovery not enough to curb QE2

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US economic recovery not enough to curb QE2

Federal Reserve officials indicated last month that it was too early to consider scaling back their plan to buy a total of $600bn in long-dated Treasury bonds by the end of June, in spite of the acceleration in the US economic recovery.

The US central bank’s resistance to reversing the quantitative easing programme – nicknamed QE2 – came even as officials offered a more encouraging snapshot of the economy. They said growth would pick up “somewhat” in the coming months, citing a better “tone” in the labour market and stronger measures of production and consumer spending.

They also pointed to the $858bn fiscal package signed into law by President Barack Obama last month – which extended Bush-era tax rates, cut the payroll tax and extended unemployment insurance – as supporting recovery. Some also saw the risk of deflation – one of the big concerns ahead of the QE2 plan’s announcement – as “having receded somewhat”.

Indeed, the depressed state of the housing market, the reluctance of businesses to ramp up their hiring, and continued deleveraging by households and companies continued to restrain the US economy, according to the minutes. Fed officials also pointed to the existence of continued “downside risks” to the recovery, including the potential spillover from the sovereign debt woes in Europe. They also said that inflation was expected to remain “for some time” below the level which the Fed believes to be consistent with its mandate, indicating they did not foresee price pressures building rapidly.




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