–Fed Policy Should Remain ‘Very Accommodative’ for Next Few Years
–Little Signs Quantitative Easing Fueling Infl, Asset Bubbles
–US Must Reduce Deficit, But Gradually to Avoid Harming Recovery

By Heather Scott

WASHINGTON (MNI) – U.S. monetary policy should remain “very
accommodative” for the next few years, including further quantitative
easing which would be “justified” if growth weakens more than expected,
the OECD said in its latest economic outlook released Thursday.

“With substantial slack in the economy, low levels of inflation and
subdued bank lending, monetary policy should remain very accommodative
for the next few years and be withdrawn only as the economy recovers,”
the Organization of Economic Cooperation and Development said.

The OECD forecast U.S. growth will slow to 2.2% in 2011 from 2.7%
this year, before picking up to 3.1% in 2012. Inflation is expected to
be a tepid 0.9% in 2011 and 2012 after an expected 1.7% this year.

Output growth has slowed and though positive has been too weak to
reduce the unemployment rate significantly, the OECD said.

“The Federal Reserve should continue to support growth, as
inflation remains well contained and the economy continues to run well
below capacity,” the report said, adding that “If growth turns out to be
significantly weaker than projected, action to lower real long-term
rates via further quantitative easing would be justified,
notwithstanding uncertainties associated with the use of such
unconventional policy tools.”

And following criticism of the latest round of quantitative easing
the Fed announced Nov. 3, including from regional Fed bank presidents,
the OECD said, “At present, there is little sign that continued
extraordinarily loose macroeconomic policy settings are leading to an
unanchoring of inflation expectations or another asset price bubble
(outside of certain commodities), though the risk of such outcomes will
rise the longer the normalization of monetary conditions is delayed.”

Still, in a nod to the inflation risk, the report said, “In
addition to keeping policy interest rates broadly unchanged in 2011, the
Federal Reserve could also reaffirm its commitment to price stability by
adopting an explicit medium-term inflation target.”

In addition to supporting economic growth, loose monetary policy
“will help the banking system adjust to the stricter capital standards
expected following the adoption of Basel III rules.”

The report also stressed the need for “ambitious reforms” of tax
policy and entitlement spending to unwind fiscal imbalances, but
cautioned about the timing.

“With high budget imbalances and a fast-rising federal debt,
however, fiscal authorities need to reduce the deficit, although only
gradually to avoid harming the recovery,” the OECD said.

“The Administration should follow through on its plan to stabilize
the debt-to-GDP ratio by 2015, which will entail further consolidation
measures than have currently been laid out, such as implementing the
upcoming recommendations of the President’s Fiscal Commission in the
challenging areas of tax policy and entitlement spending.”

** Market News International Washington Bureau: 202-371-2121 **

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