Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc, said that while the Federal Reserve will “very likely” take more steps to ease monetary policy, asset purchases will have a limited effect on the economy.
“They’re going to do quite a lot but it’s probably still going to fall short,” Hatzius said today at a fiscal policy conference in Washington. “There is going to be a natural bias towards caution among monetary policy makers.”
Hatzius, who’s based in New York, said another $1 trillion worth of asset purchases by the Fed would probably lower long-term interest rates by about 0.25 percentage point, adding a “few tenths of additional GDP growth.” The Fed bought $1.7 trillion worth of Treasury and mortgage debt in a program that ended in March. The purchases helped push mortgage rates to historic lows, stabilizing housing.
New York Fed Bank President William Dudley on Oct. 1 said the Fed would probably need to take action to spur the recovery and avert deflation, one of the clearest signs policy makers would start a second round of unconventional monetary easing as soon as the central bankers’ next meeting Nov. 2-3.
Dudley, who serves as vice chairman of the Fed’s policy making Open Market Committee, said in last week’s speech that $500 billion of asset purchases, for example, would add as much stimulus as reducing the Fed’s benchmark rate 0.5 percentage point to 0.75 percentage point, depending on how long investors expect the Fed to hold the assets.
Hatzius, 41, said his two scenarios for the U.S. economy were “pretty bad” and “very bad.”
The economy will grow between 1 percent and 2 percent through early next year, with unemployment drifting up “to somewhere around 10 percent, maybe a little above 10 percent,” he said. In August, the jobless rate was 9.6 percent, close to the 26-year high of 10.1 percent reached in October 2009.
“It’s going to take many years before you get back to anything approaching full unemployment, and 2014 is very likely too early,” said Hatzius.
He placed the odds of a renewed recession at 25 percent to 30 percent, which he told reporters was up from 15 percent to 20 percent at the beginning of the year. The double-dip recession scenario was based on a renewed decline in housing prices and failure to extend most of former President George W. Bush’s tax cuts when they expire at the end of this year.
Hatzius was rated by Bloomberg Markets Magazine last year as top forecaster of the U.S. economy for the period spanning the second half of 2008 through the first six months of 2009. He and his team were also No. 1 in forecasting GDP and No. 2 in estimating unemployment and Federal Reserve changes to the fed funds rate.