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
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.