With the U.S. economy in recession and getting weaker by the month, and with the financial system stabilized but credit conditions hardly ideal, the United States over the next few months will embark on policy initiatives that are likely to be historic.
Both fiscal and monetary policy will be used. The incoming Obama Administration is expected seek approval from the new U.S. Congress of a record $700-$850 billion fiscal stimulus package. Meanwhile, the U.S. Federal Reserve will continue with its quantitative easing plan, including $500 billion in purchases of mortgage/asset-backed securities instruments as part of its effort to improve credit market liquidity.
The need for stimulus: incontrovertible
The above initiatives will forward a pair of numbers that some Americans will undoubtedly find hard to imagine, let alone accept: a budget deficit for this year and the next of at least $1 trillion and a Fed balance sheet rising past $2.5 trillion. Most economists argue that the actions are needed to jump-start a U.S. economy that shows almost no signs of pulling out of its deepest and longest recession in decades: corporate earnings are forecast to decline, job losses continue at an alarming rate, with unemployment rising.
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