Following the lead of the US

So the US economy unexpectedly shrank in the final quarter of last year by 0.1%. Bit of a shocker since this is the first time this has happened since the end of the recession in 2009. The Fed has quite rightly just called it a ‘pause’ due to transitory issues. Certainly it is true to say that the steep drop in defence spending, uncertainty over the fiscal cliff and the effects of the hurricane that swept up the east coast in November combined to hit growth. And these certainly are temporary measures; the US Conference Board acknowledged that ‘one-time factors put the number below the trend’.

I guess it’s interesting to see what the Fed has done about it. For a start it has kept its record low key interest rate between 0% and 0.25%. Furthermore it said that it would continue its $85bn a month bond and mortgage security purchases to support a stronger economic recovery. It said the easy monetary policy ‘will remain appropriate for a considerable time after the asset programme ends and the economic recovery strengthens’. What that says is that we are in for the long game. We are here to give assistance until things go back to normal. That’s what brings confidence back to the markets.

Whilst we are trying to emulate this in the UK I’m not sure we are going far enough. For instance the Funding for Lending Scheme which has done much to assist the mortgage lending market in the past few months is apparent that it is only a temporary measure and has a defined end date. Then what? We need some measures that have some longevity.

Some interesting lessons to learn this side of the pond perhaps…