US Fed could cut stimulus by end of year

Dubai: The US Federal Reserve's programme of economic stimulus will likely finish by the end of the year, according to Dennis Lockhart, President and Chief Executive Officer at the Federal Reserve Bank of Atlanta.

He also said the Fed could start raising interest rates by the middle of next year.

"By the October or December [Federal Reserve] meeting we will have completely phased out quantitative easing [QE]," Lockhart said in a speech at the Dubai International Financial Centre. The Fed has been using quantitative easing since 2008 to help it maintain low interest rates, but last year the decision was announced to start tapering the programme. Since December, the Fed has reduced the stimulus from $85 billion (Dh312 billion) a month to $45 billion.

The initial reduction in stimulus caused capital flows to move out of emerging markets and into the US, causing equity markets around the world to plummet.

"The condition in emerging markets, if they have not stabilised, they have calmed down," he said.

Lockhart also said the US economy will grow by 3 per cent in the second quarter.

"I'm pretty confident it will be at or exceed 3 per cent," he said, referring to the annualised growth rate.

However, Lockhart said in his speech that "it may not be clear for several months, or even quarters, whether the US economy is undeniably on a stronger and sustained growth path around a run rate of 3 per cent. To gauge the true extent of economic expansion, I will be watching for a stronger rate of industrial production growth, improved demand for capital goods, and a step-up in consumer spending."

Cautiously

A stronger US economy has also started talk of inflation and the necessity of raising interest rates. He said preliminary data shows some firming of the US inflation rate. The Federal Open Market Committee has set an inflation goal of 2 per cent. Lockhart said the Fed could start the process of raising interest rates by the middle of next year.

"In the second half of next year will be the point of lift off," he said, adding that the Fed would need to do so cautiously.

"After several years of zero interest rates we have to be aware of bubbles in assets that could cause a quick turn around in the economy, but I don't see anything to be immediately concerned about."

Lockhart also identified several threats to the US economy, including global financial instability, and the political crisis between Russia and Ukraine.

On the positive side, Lockhart identified the housing and energy sectors as areas that are currently helping boost the economy.

Source: gulfnews.com

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