By Merlin Hernandez

In a bid to jumpstart the tepid recovery, and to boost investment and the employment rate, the Federal Reserve has increased its stimulus with monthly treasury purchases of $45 billion. This is in conjunction with the $40 billion in mortgage-backed securities per month which started  last September. While the new purchases can only come by creating new money, the prime rate is held near zero to further encourage borrowing, and with current inflation below 2%, new movement in the economy is expected to cushion any rise in inflation.

But market response has been unsurprisingly lukewarm reflecting nervousness about the looming fiscal cliff which has been cited by the IMF as the biggest threat to the US economy, and raising some fears of a liquidity trap if the economy is allowed to go over the cliff even for a short period. Businesses have halted new expenditures, including new hiring in fear of a stringent fiscal policy come January if agreement is not reached in Washington on the extraction of some $600 billion from the economy.

Strong seasonal retail showing and a further reduction in jobless claims did not shift investor caution either, with the Dow Jones and S&P index down slightly at the end of the business day on Dec. 13 (Thursday). The uncertainty over fiscal cliff negotiations between Democrats and Republicans also has international implications. Even with news of the ratification of the long-awaited Greek bailout that could tame the European debt crisis, the European Central Bank cut its growth forecasts. This is in anticipation of US economic setbacks which would summarily reduce US demand for European goods if the government fails to reach agreement on tax and spending cuts.

China’s emerging recovery, after a two year slowdown, had been gaining momentum with growth in the manufacturing sector. But the prospect of a stalled US recovery leading to much reduced US demand and export revenues has caused contraction in investor enthusiasm. There is concern that GDP growth will be significantly below targets if the US does not resolve its fiscal issues, with talk of an expansion of the China deficit as a result.

The US Federal Reserve is already revising future growth prospects downward based on the current economic standstill. Q4 of 2012 was expected to be the cranking up period for slow but steady growth in 2013 but as it stands, the world may just have to brace itself for a new recession if Congress is unable to reach a bipartisan compromise by December 31.

Related Articles on this Blog
• Current Monetary Policy
• Fiscal Cliff
• Deflation Threat
• October Insights 2012: A monthly eye
• Is the recession over?
• European Unrest

Merlin Hernandez is an entrepreneurial development and management consultant who operates mainly in the small and medium enterprise sector. She has extensive experience in International Trade. For more information on this topic, please send enquiries to businesssolutions1168@gmail.com

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