Fed may struggle to deliver expected growth boost

Sun Aug 26, 2012 3:05pm EDT
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By Alan Wheatley, Global Economics Correspondent

LONDON (Reuters) - It's the end of August, so all eyes will again be on the small Wyoming resort town of Jackson -- population 9,577 -- to see whether Federal Reserve Chairman Ben Bernanke fuels or dampens hopes of fresh monetary easing to lift the U.S. economy.

The annual Jackson Hole summer retreat hosted by the Kansas City Fed has become a highlight of the global central banking calendar.

Expectations this year have not soared to the heights of 2010 or 2011, but equity and commodity prices have been rising and could react badly if the U.S. central bank chief pulls his punches.

After all, "many" Fed policymakers judged at their August 1 meeting that extra easing would probably be warranted fairly soon in the absence of signs of a "substantial and sustainable" economic recovery, according to the minutes of their deliberations.

Yet some economists reckon not even a third round of Fed asset purchases would do much to perk up world growth.

For a start, bond yields are already very low and the Fed has already said it expects short-term rates to remain close to zero at least until late 2014. The law of diminishing returns is at work.

Above all, buying more U.S. Treasuries or mortgage-backed securities would do nothing to address the euro zone's underlying problems or wean China off its dependence on an investment boom that looks unsustainable, said Julian Jessop with Capital Economics, a London consultancy.

"These, and not the health of the U.S. financial system, are now the biggest challenges facing the global economy," he said.   Continued...