Tuesday, 26 March 2013

US economy grows as Fed policy gains traction

The US economy appears to be maintaining its growth momentum.

A report from the Chicago Federal Reserve on Monday showed that its national activity index rose to +0.44 in February from -0.49 in January. Although the three-month moving average of the index fell to +0.09 in February from +0.28 in January, the report said that the readings indicate that economic growth “was somewhat above its historical trend”.

Many economists think that the Federal Reserve's monetary policy has been helpful in boosting growth. From Reuters last week:

The Federal Reserve's aggressive easing of monetary policy is proving surprisingly effective at blunting the blow to the economy from tighter fiscal policy, according to economists who have been scrambling to raise their growth forecasts...

"Monetary policy is beginning to gain some traction here," said Tom Higgins, global macro strategist at Standish Mellon Asset Management in Boston.

According to Higgins, if it were not for the monetary stimulus, the economy would probably be facing growth of a 1 percent annual rate or less. As it is, he expects growth to come in at a 2.5 percent pace in the first quarter.

But the Fed's monetary policy works through financial markets, and the increased risk-taking there is becoming obvious. From Bloomberg on Monday:

Money managers from Ares Management LLC to Onex Corp. (OCX) are borrowing at the fastest pace in six years to buy the type of speculative-grade loans that federal bank regulators warned last week is becoming riskier.

Ares, which oversees $59 billion, and Onex’s credit unit are among firms that have raised $22.9 billion of collateralized-loan obligations this quarter, approaching the all-time high of $26.4 billion in the three months ended June 30, 2007, according to Royal Bank of Scotland Group Plc. Leveraged-loan mutual funds have received their two biggest weekly inflows since January.

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