Retreating U.S. stimulus poses risk to world recovery

Sat Jan 4, 2014 2:06pm EST
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By Robin Emmott

BRUSSELS (Reuters) - The world economy should finally overcome its hangover from the global financial crisis this year as growth picks up and house prices rise, but reduced U.S. monetary stimulus will pose a challenge.

After months of angst, investors will see how the U.S. Federal Reserve handles its decision to curtail its policy of easy money, starting from this month.

U.S. jobs data on Friday will give markets a sense of the pace at which the Fed plans to pare back its bond-buying program, while minutes on Wednesday from its December 18 meeting will throw light on the central bank's thinking.

"The United States will be the main focus given the Fed has finally started to taper its asset purchases," said James Knightley, a senior economist at ING in London, referring to what economists call the "tapering" of U.S. stimulus.

"Nonetheless, the Fed has made it clear that it will not be looking to run down the size of its balance sheet anytime soon, while rate hikes remain some way off," he said.

The Fed's stimulus revived the U.S. economy after the biggest crisis since the Great Depression and the U.S. economy is leading the global recovery. The United States could grow by up to 3 percent this year, helping the global economy to expand by almost 4 percent, according to the International Monetary Fund.

The delicate job of bringing the $85 billion-a-month program gradually to an end will almost certainly fall to Janet Yellen, whose candidacy as the next Fed chair will be voted on by the U.S. Senate on Monday.

Yellen, who would become the first woman to chair the U.S. central bank, would take the reins on February 1, the day after Ben Bernanke ends his two-term stint.   Continued...

The facade of the U.S. Federal Reserve building is reflected on wet marble during the early morning hours in Washington, July 31, 2013.REUTERS/Jonathan Ernst