US Federal Reserve set to boost stimulus - Gulfnews

Washington: Federal Reserve officials may immediately strengthen their commitment to record monetary stimulus after a faltering economic recovery and a US credit-rating cut provoked a rout in global stocks.

Chairman Ben S. Bernanke and his colleagues are weighing the use of more untested policy tools after two rounds of bond buying totalling $2.3 trillion (Dh8.4 trillion) failed to spur sufficient economic growth and reduce unemployment below nine per cent.

The Federal Open Market Committee held its regular meeting Tuesday in Washington following the worst day for US stocks since December 2008.

"The odds of more dramatic action are higher," said Vincent Reinhart, a former chief monetary policy strategist at the Fed. "However, they might not want to be seen as responding so directly to equity prices," Reinhart said, adding that policy makers may wait to signal a new round of bond purchases until Bernanke gives a speech on August 26 at a Fed conference in Wyoming.

Reinhart is a resident scholar at the American Enterprise Institute in Washington.

Julia Coronado, chief economist for North America for BNP Paribas in New York, said the central bank may say the economic slowdown is persisting longer than expected. Policy makers may also say the Fed's securities portfolio will remain at a record for an "extended period" and replace shorter-term securities with longer maturities to reduce rates on longer-term debt, she said.

The Fed reiterated in June that the overnight interbank lending rate would be "exceptionally low" for an "extended period" and said the policy of reinvesting maturing securities to keep the balance sheet steady would be maintained, without saying how long.

The drop in global stocks, further fuelled by concerns over Europe's debt crisis, adds to pressure on the Fed. The Financial Stability Oversight Council, which is chaired by Treasury Secretary Timothy F. Geithner and also includes Bernanke, convened by teleconference on Monday afternoon, according to a government official who declined to be named because he wasn't authorised to discuss the matter.

The Fed is likely to start a third round of asset purchases, and "they certainly should do something right away," said Kenneth Rogoff, a Harvard University economics professor and former Fed researcher who attended graduate school with Bernanke. It's not clear if Bernanke would have the support of the Federal Open Market Committee, Rogoff said. Read More