Fed Marchi: U.S. monetary policy will shift to next year

"I have always believed that at some unknown place, there's something staring at us. Unfortunately, it is government." U.S. director Woody Allen's words can be used to describe the current U.S. economy.

The government and the central bank's actions are leading the U.S. economy out of recession, but investors are beginning to talk about stimulating economic policy out of time. In an interview with CBN interview, as a former senior economist at the Federal Reserve, the U.S. director of economic research at Barclays Capital Dienmaqi (Dean Maki), said the Fed to adjust monetary policy next year, the U.S. economy will be strong growth.

CBN: investors started to talk about loose monetary policy and fiscal policy to withdraw. In your opinion, when will the Fed to change policy?

Marchi: next year, the Fed will begin to reduce the size of excess reserves, in September began to raise interest rates and interest rates at the end of the year to 1%. But that does not mean that the government support policies for the end of the economy, they just extremely loose monetary policy into a very lenient.

CBN: What is the reason the policy change? Is the inflation?

Marchi: Not. Inflationary pressure is not large, is expected next year, the core consumer price index increase of only 1.1%, the Fed is only used to combat serious deflation policy adjustments.

Strong growth next year, the United States will appear. From the United States history, a strong economic recovery is always to follow the severe economic recession, the recession more severe, the more robust economic recovery.

CBN: This strong economic growth come from? Does not seem to restore the credit markets.

Marchi: Growth was primarily driven by changes in inventories. In the second quarter, we see companies slash inventory, which means that the production is much lower than the sales. Business response to the crisis was overdone. Is expected in the second half the economy will see strong growth, this growth is based on inventory levels to cover, as companies already have this capacity, so that economic growth has little to do with the credit situation. From a historical point of view, the economic recovery does not necessarily require the initial credit support, credit growth tend to lag behind the economic growth of 5 to 6 quarters.

This kind of production recovery will boost job opportunities, income, consumption increases. The level of U.S. corporate profits are expected in the second half of 20% year on year growth, profit growth will enable these enterprises to expand their business.

CBN: But the job market situation remains worrying, how do you think of this market situation?

Marge: The labor market is lagging economic indicators, particularly the unemployment rate. The United States next year, the unemployment rate will drop, the current unemployment rate is close to high.

CBN: the unemployment rate will eventually fall back to what level? Does the financial crisis will affect the status of the natural rate of unemployment?

Marche: the Fed does not recognize the natural rate of unemployment has risen, they will continue to strive to make the unemployment rate back to 4.8% ~ 5%.

The natural rate of unemployment is very difficult to forecast, often afterwards in order to really understand it. Because of the economic crisis, the natural rate of unemployment may rise, as people shift from a declining industry, an emerging industry is to take time. But I do not think this will become the market a relatively short time the key, even if the unemployment rate fell to close to such a high level needed for a long time. Expected end of next year the unemployment rate is 8.8%.

CBN: If the natural rate of unemployment does rise, but the error estimates of the Federal Reserve, this will become a hint of inflation?

Marge: Of course, if the natural rate of unemployment increase to 7%, while the Fed is still making efforts to push the unemployment rate back to 5%, which will result in the threat of inflation. The situation in the late 60s of last century there have been the beginning of 70, when the Federal Reserve that the natural rate of unemployment should be 4%, but the fact that when the unemployment rate at 6% and inflation has gone up.

CBN: So the potential economic growth rate will be?

Marchi: U.S. potential growth rate will be reduced because the baby boomers who will retire, so that slower population growth, labor force. Potential economic growth in the United States will be only 2.25%, as long as the economic growth rate of more than this value, the unemployment rate will drop. This means that compared to previous years, the low rate of economic growth also help the unemployment rate drops.

CBN: the stock market seems to have anticipated economic recovery, but the bond market in particular, the performance of the bond market does not agree to this. What is the reason?

Marge: The stock market is expected to rebound in the economy and respond to, which is very natural. Is not normal is that economic growth has been widely substantiated, the level of Treasury yields fell.

The main reason is the Fed's asset purchases. The Fed not only to buy government bonds, but also buy mortgage-backed securities, the latter a greater impact. Even in the economic recovery, this behavior to a large extent so that bond yields remain at a lower position. However, we expect the Fed's purchase of operations will continue until the end of March next year. On this basis, the 10-year bond yields from the current level (3.4%) rose to 4.6%.

CBN: This policy change impact on the dollar do? U.S. dollar in recent months, the alarming decline.

Marge: Of course. First of all, the dollar will continue to decline in the coming months, as U.S. economic stimulus plan is more aggressive than in other countries, currency depreciation is well deserved. But next year, once the Fed began tightening cycle began suggesting the dollar will rebound.