TEXT-Fitch: Fed's Twist extension impact greatest on housing market
June 21 - The extension of the Fed's Operation Twist is likely to support the housing market's gradual healing by keeping downward pressure on long-term interest rates. Its impact on the near-term growth prospects on the US economy is likely to be limited. The focus on the potential for further monetary stimulus, including another round of quantitative easing, underscores the still fragile economic recovery. Fiscal policy will be a drag rather than a source of stimulus. US fiscal and monetary policy stimulus were successful in containing the severity of the recession and supporting recovery, Fitch Ratings and Oxford Economics highlighted in a recent study,. They are not, however, viable long-term drivers of economic growth and have exacerbated US government indebtedness. The slowdown of US economic growth during the spring has raised questions about the sustainability of the recovery, especially because business investment and job creation has dropped even though corporates are reporting strong profits and benefit from low interest rates. While the FOMC has revised down its growth forecasts for the US economy, it still suggests a moderate recovery that gradually gains strength into 2013 and beyond, a view we share in our latest Global Economic Outlook. This is premised on the assumption that the so-called fiscal cliff - equivalent to the withdrawal of between 3.0% and 5.0% of GDP in public spending cuts and higher taxes - will be avoided. The six-month extension of Operation Twist will flatten the yield curve through the purchase of USD267 billion of longer term treasury securities and simultaneous sale of shorter term treasuries. This cuts longer term rates and stimulates consumer and investment demand. This mix of nonconventional monetary policies, including Operation Twist, may have added approximately 1% to GDP growth over the past 12 months, while rate policy may have produced a similar benefit, according to the Fitch Ratings and Oxford Economics study. This implies that the US economy may have experienced little or no growth over the most recent period if it weren't for the positive impact of monetary policy. We expect the importance of stimulus packages to wane as the housing market improves. This will boost household finances and support an upturn in construction activity from current historic lows. Combined with healthy corporate balance sheets, private investment as well as consumer spending will gradually accelerate in the latter half of this year and in 2013. Our forecast has not changed: Fitch expects a moderate economic recovery this year and next. Growth should accelerate to 3.0% on the basis that there remains spare capacity in the US economy.
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