US government picks growth over inflation, dollar fears

March 21st, 2008 - 10:00 am ICT by admin  

By Chris Cermak
Washington, March 21 (DPA) The US has made every effort since the start of 2008 to keep the world’s largest economy out of recession, but some quarters at home and abroad have begun voicing concerns over the weak dollar and higher inflation that could be the result. Volatility in the stock market and the ongoing credit crisis have preoccupied the government to date, prompting a series of dramatic steps by the Federal Reserve to ease concerns about the viability of financial institutions and prevent a sharp drop in lending to struggling homeowners.

The Fed cut its key interest rate by 0.75 percentage points Tuesday to 2.25 percent, and has slashed rates by a total of three percentage points since September in a bid to boost the sagging US economy.

But the decisions have not been unanimous. The Fed itself recognised that “inflation has been elevated and some indicators of inflation expectations have risen”.

Two of the board’s 10 members voted against the most recent rate cut. It was the fifth straight Fed meeting with dissenting votes - the first time that has happened since the central bank began publicly revealing policy decisions in 1994, according to The Wall Street Journal.

Charles Plosser, president of the Federal Reserve Bank of Philadelphia and one of the dissenters, earlier this month said: “We cant wait too long for inflation expectations to materialise, otherwise you get behind the curve.”

Gross Domestic Product grew at an annualised 0.6 percent in the last quarter of 2007, and most economists believe the US has since entered a recession, but surging energy and food prices in the last year have also played a large part in reducing consumer spending.

“The Fed needs to quit chasing declining GDP growth and instead focus on curbing inflation and anchoring inflation expectations,” Lee Hoskins, former president of the Cleveland Federal Reserve Bank wrote in Forbes Magazine this week.

European countries meanwhile have expressed concern over the weakened dollar, which has continued to hit new lows against the euro and other currencies in the last few weeks and will hardly be helped by the latest rate cut.

The euro reached a record high of $1.59 Monday and was trading at $1.56 Wednesday. But with the resulting rise in international tourism and exports propping up growth, US officials have given little indication they will intervene on the dollar’s behalf.

European Union leaders last week warned that the surging euro was threatening economic growth on the continent, in a rare statement on currency concerns at the end of a summit of the bloc’s finance ministers.

The dollar also reached a record low against the Japanese yen last week, and Japanese Finance Minister Fukushiro Nukaga warned Tuesday that the dollar’s decline has been “excessive”.

Such talk has fuelled speculation that an intervention - similar to when the world’s major central banks bought up the struggling euro in 2001 - could come as soon as next month.

“At what point do you actually turn around and say this is creating disorderly markets?” Simon Derrick of the Bank of New York told Bloomberg financial news. “There is growing speculation that we could be thinking about intervention.”

But while President George W. Bush has maintained that the US wants to see a strong dollar, the government has instead been focussed on bolstering consumer spending - about $130 billion in tax rebate cheques are to be sent out in May - and finding ways to help homeowners threatened with foreclosure.

Treasury Secretary Henry Paulson said Monday the currency’s rise hinged on overall economic recovery, shrugging off a suggestion that a currency intervention was imminent.

“Our economy has ups and downs,” he said. “We have strong long-term fundamentals that will be reflected in our currency markets.”

For the US, economic recovery measures have so far revolved mostly around finding an answer to the mortgage crisis and falling housing prices that have put the banking sector and financial markets under severe pressure.

The Federal Reserve has opened up more than $400 billion in Treasury securities over past weeks through a variety of avenues to help struggling investment banks, hoping to avert a serious contraction in lending would almost certainly put greater strains on the economy.

“Orderly financial markets are critical to the health of our economy businesses rely on access to credit in order to invest and create jobs, and families draw on credit markets to finance their homes and borrow for education,” Assistant Treasury Secretary Anthony Ryan said Wednesday.

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