An expected rebound in the U.S. economy this year could be choked off by rising interest rates and inflation, sending the nation into a double-dip recession in mid to late 2010, U.S. Chamber of Commerce Chief Economist Martin Regalia warned Thursday.
“I don’t see a double dip occurring within the next year,” Regalia said at a press briefing. Instead, he predicts that thanks to extensive fiscal and monetary stimulus, a U.S. economic recovery is “literally just around the corner.”
Growth won’t be strong, though, and Regalia figures there is a one in five chance that a recovery could be snuffed out by mid-2010 if the Federal Reserve doesn’t begin retracting the flood of cash it has injected into the economy.
“We have increased the monetary reserves and the money base dramatically,” Regalia noted. While he said fiscal and economic stimulus were needed, “in the near term we’ve got to unwind what we did” to pump up the economy.
If the Fed moves too slowly and excess cash begins circulating freely, Regalia said it could unleash inflation, weaken the U.S. dollar and boost long-term interest rates, crushing any recovery. Stagflation, where growth is stagnant while inflation rages, also can’t be ruled out, he added.
The Fed’s announcement Wednesday that it would leave short-term interest rates unchanged did not mention when or how the central bank would start reversing monetary stimulus. Regalia said the silence didn’t go over well with markets looking for the Fed to assert its traditional inflation-fighting role.
Read full story [Wall Street Journal]
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