SINGAPORE (Reuters) - The United States should be planning for a possible second round of fiscal stimulus to further prop up the economy after the $787 billion rescue package launched in February, an adviser to President Barack Obama said.
“We should be planning on a contingency basis for a second round of stimulus,” Laura D‘Andrea Tyson, a member of the panel advising President Barack Obama on tackling the economic crisis. said on Tuesday.
Addressing a seminar in Singapore, Tyson said she felt the first round of stimulus aimed to prop up the economy had been slightly smaller than she would have liked and that a possible second round should be directed at infrastructure investment.
“The stimulus is performing close to expectations but not in timing,” Tyson said, referring to the slow pace at which the first round of stimulus had been spent on the economy.
Tyson, who is a dean of the Haas School of Business at University of California, Berkeley and was also a White House economic adviser to former President Bill Clinton, said an additional factor affecting the stimulus was that the economy was in a far worse shape than the administration had estimated.
Tyson dispelled concerns about the ballooning U.S. fiscal deficit that is estimated to hit nearly 10 percent of gross domestic product, and its possible inflationary consequences.
“The Federal Reserve is not going to allow the U.S. to inflate away its debt,” she said.
Asked about the value of the dollar, Tyson said the market was wrong to be concerned about inflation in the U.S. economy, given the amount of slack in most industries.
“It is almost in no one’s interest to have a sharply spiraling downward dollar,” she said. The dollar ought to decline in the longer term on a trade-weighted basis but she did not anticipate a sharp and sudden decline.
Turning to the Federal Reserve’s near-zero rates policy and credit easing, Tyson said inflationary expectations remained “well-grounded”, giving policymakers room to pursue these expansionary policies.
She said she was also not worried about whether the Fed can exit such a policy. “The Federal Reserve has the ability to make rapid adjustments in its balance-sheet as necessary.”
But Tyson said the combination of near-zero interest rates and heavy debt issuance would keep the U.S. yield curve steep. And, while the rate at which the economy was contracting had fallen, the latest jobs data showed the economy was still not stabilizing.
U.S. unemployment rate hit 9.5 percent in June, the highest in nearly 26 years.
Editing by Jan Dahinten