The U.S. economy will probably expand at a moderate pace this year and next, in part because fiscal tightening will weigh on growth, according to Vincent Reinhart, chief U.S. economist at Morgan Stanley.
“We face headwinds,” Reinhart said in an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “The world is a risky place” between the sovereign debt crisis in Europe, potentially rising energy prices and “that fiscal cliff which is an unstoppable force.”
Reinhart predicted in an April 2 report that the U.S. economy will expand 2 percent this year and next. Bush-era tax cuts are set to expire at the end of the year, and a deficit reduction law requiring $1 trillion of cutbacks also kicks in if lawmakers can’t agree on a new plan.
“We have legislated a sudden stop in our fiscal posture,” Reinhart said. That may subtract about 5 percentage points from growth next year, he said. “When you do that sort of sudden stop, you do not help economic activity and you worsen the deficit.”
U.S. stocks halted the longest slump of the year as Alcoa Inc. (AA:US) opened the earnings season with an unexpected profit. The Standard & Poor’s 500 Index advanced 0.8 percent to 1,369.37 at 11:51 a.m. in New York, ending a five-day decline. Treasuries weakened for the first time in six days.
The potential drag from fiscal restraint contributed to the rationale behind Federal Reserve policy makers cutting their growth forecasts for this year and 2013 at their January meeting, according to the minutes of the gathering. At the same meeting, they also decided to extend their plan to keep interest rates near zero through at least late 2014 instead of mid-2013.
If Fed officials see the need to add to their record monetary stimulus, they will probably first turn to communications tools to “reassure investors that the intent is to keep the policy rate low for a very long time,” Reinhart said. “If they need to after that, they can resort to quantitative easing.”
The Fed has kept its benchmark rate near zero since December 2008 and purchased $2.3 trillion of bonds in two rounds of so-called quantitative easing. The central bank is now pursuing a maturity-extension program announced in September to replace $400 billion of short-term debt with longer-term securities. The so-called Operation Twist is scheduled to be completed in June.
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