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Beware the Looming ‘Monetary Cliff’: Hatzius

Thursday, 21 Jun 2012 | 8:00 AM ET

After reading so much about the dreaded “Fiscal Cliff” these days, market participants can add another term to their fear lexicon thanks to Goldman Sachs: the “Monetary Cliff.”

Fed Chief Ben Bernanke Testifies to House Budget Committee
CNBC
Fed Chief Ben Bernanke Testifies to House Budget Committee

On Wednesday, the Federal Reserve extended its so-called Operation Twist program(selling short-term Treasurys and using the proceeds to buy long-term Treasurys) to the end of this year.

This timeline — and the central bank’s failure to explicitly extend its low-rate guidance — sets the country up for a drop-off in accommodative Fed policies, points out the firm’s chief U.S. economist, Jan Hatzius.

“The economy now faces a ‘monetary cliff’ in addition to the ‘fiscal cliff,’ ” wrote Hatzius, in a note to clients. “Our forecast implies that the U.S. economy will continue to struggle with slow growth and high unemployment of more than 8 percent going into 2013. Specifically, we forecast a slowdown in real (gross domestic product) growth to just 1.5 percent (quarter-on-quarter, annualized) in the first quarter of 2013.”

By now, one has surely heard of the so-called fiscal cliff, which refers to the expiration at the end of this year of several tax cuts enacted under President George W. Bush, as well as mandatory spending cuts resulting from the debt ceiling fight last summer.

The two cliffs lead Hatzius to his dire forecast, but also make the market-moving economist believe that the Fed won’t just sit idly by.

“The concluding sentence in the post-meeting statement now says that the FOMC ‘is prepared to take further action,’ whereas previously the statement said that the committee would ‘regularly review the size and composition of its securities holdings,’” points out Hatzius.

“The most natural avenue would be a return to large-scale asset purchases, but Chairman Bernanke’s reaction to a question on the Bank of England’s recently announced credit easing program — he simply said ‘we are interested’ — suggests that a Fed program explicitly designed to improve credit availability is also a possibility,” wrote the economist.

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