Doubt Fed's purchases will promote growth

For US$2 trillion ($2.6 trillion), Federal Reserve chairman Ben Bernanke may buy little improvement in growth, employment or inflation over the next two years.

Firms with large-scale models of the US economy such as IHS Global Insight, Moody's Analytics and Macroeconomic Advisers project only a moderate impact from additional Fed asset purchases.

The firms estimate that the unemployment rate will remain around 9 per cent or higher next year whether the Fed buys US$500 billion or US$2 trillion of US Treasuries in a second round of unconventional stimulus.

The meagre impact shows the conundrum US central bankers face.

Interest rates near zero have failed to produce the intended cycle of borrowing and spending among consumers and businesses.

Unemployment hovering near a 26-year high, partly a symptom of weak demand, keeps downward pressure on prices, and further declines in inflation would raise borrowing costs in real terms, making credit more expensive.

"The danger of not doing anything would be pretty high," said Antulio Bomfim, managing director at Macroeconomic Advisers.

"Expanding the balance sheet might actually help reduce the risk of deflation."

Economists predict unemployment will rise to 9.7 per cent when the Labor Department releases its September report today, from 9.6 per cent in August.

US central bankers have kept their benchmark lending rate near zero for almost two years.

In March, they finished US$1.7 trillion in purchases of Treasuries, mortgage-backed securities, and housing agency bonds.

A slowdown in growth in the middle two quarters of this year prompted the Federal Open Markets Committee last month to warn that inflation rates were "somewhat below" its mandate to achieve stable prices and full employment.

Macroeconomic Advisers predict the Fed will begin with purchases of close to US$100 billion a month starting next month, boosting the balance sheet by as much as US$1.5 trillion if necessary.

Purchases of up to US$2 trillion would raise the annual growth rate of gross domestic product by 0.3 percentage point in 2011 and by 0.4 percentage point in 2012.

- BLOOMBERG