A Fed Decision to Release More Money Will Only Have Feeble Impact

“There’s no doubt that the U.S. has fallen into a liquidity trap. That said, a Federal Reserve decision to release more money will only have a feeble impact.”*

In a September 16 interview with Seoul Kyungjae, JP Morgan chief economist Michael Feroli conjectured that the Fed would decide to carry out Operation Twist at the coming meeting of the Federal Open Market Committee (FOMC). Feroli’s diagnosis was that the U.S. economy had a 50 percent chance of falling into a double dip. With a Ph.D. in economics from New York University, Mr. Feroli served as an economist at the Federal Reserve from 2002 until he was taken on as the chief economist at JP Morgan in 2006.

“There is a high possibility the Fed will decide on Operation Twist to extend the maturity of security holdings. QE3 [Quantitative Easing 3] is thus not likely to happen, despite expectations,” said Feroli. The JP Morgan chief economist was of the belief that a QE3 would not be implemented unless concerns of deflation in the American economy worsened.

“The American economy will face a big headwind of financial austerity next year,” said Feroli. “Consumers will have to reduce their spending to pay off debts while the U.S. government will have to grapple with austerity measures. In such circumstances, there’s really no avoiding a fall in growth.”

JP Morgan has lowered its fourth quarter projection on the American economic growth rate from 2.5 percent to 1 percent. The projected growth rate for the first quarter of 2012 was lowered from 1.5 percent to 0.5 percent. This downward adjustment was made in response to a darkening U.S. economic forecast and next year’s increasingly certain reign of austerity.

Feroli was also pessimistic about the future of two of America’s biggest dilemmas: the housing market and unemployment. According to Feroli, lending for mortgages would decrease as the housing market confronted a problematic combination of extensive supply and toughening financial regulations. The JP Morgan chief economist was concerned that the housing market could thus face a recession for some time. As for persisting unemployment, the problem is that demand is not high enough to support the growth of firms.

Regarding pessimism that the U.S. will be subject to a lost decade, like Japan in the past, Feroli said, “Although the two countries’ economies are different, there are considerable similarities in their demonstration of just how difficult it is to recover from a burst bubble.”

*Editor’s Note: Although accurately translated, the quotes in this article could not be verified.