During most of the past year, when economic data pointed to a U.S. economic recovery, only the hardcore bears would suggest that a double-dip recession was in the works. Now, the U.S. Federal Reserve is weighing the possibility that the economy could sputter.
The Wall Street Journal reported on Tuesday that the Fed – which only recently said that the odds of a double dip recession were unlikely – is quietly debating what they can do if the economy takes a turn for the worse or inflation continues to decline.
“Fed Chairman Ben Bernanke has played down the risk of a double-dip recession and signaled guarded confidence in the recovery,” the Wall Street Journal reported. “But fiscal woes in Europe, stock-market declines at home and stubbornly high U.S. unemployment have alerted some officials to risks that the economy could lose momentum and that inflation, already running below the Fed's informal target of 1.5 per cent to 2 per cent, could fall further, raising a risk of price deflation.”
So what can the Fed do, with its key interest rate already parked at about 0 per cent? The Journal mentions three potential moves: Reinvesting cash from maturing mortgage bond in new bonds; buy more mortgage bonds and debt; and make it very clear that the key lending rate – expected by some observers to rise later this year – is going nowhere.
Economists at UBS recently pushed back their expectations for the start of a Fed rate hike to January, 2011, from September, 2010.
Meanwhile, David Rosenberg, chief economist and strategist at Gluskin Sheff (and yes, one of the hardcore bears mentioned above) believes that the Fed won’t raise rates for a long, long time. Although he didn’t give a date, he implies that a rate hike could be even further away.
