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Lagarde says policy should do the lifting

April 10, 2013 at 10:29 PM   |   Comments

NEW YORK, April 10 (UPI) -- International Monetary Fund Director Christine Lagarde in New York said monetary policy needed to do the "heavy lifting" to promote economic recovery.

"Many are worrying about the potential fallout from exceptionally loose monetary policy, especially from unconventional easing," Lagarde said in prepared remarks for a talk at the Economic Club of New York.

However, she added, generous policies were an important strategy for economic growth.

"Let me emphasize that, in present circumstances, it makes sense for monetary policy to do the heavy lifting in this recovery by remaining accommodative," she said.

The United States is among those attempting to provide liquidity in the market with a central bank asset purchasing program currently set at $85 billion per month, about half of which is spent on Treasuries with the other half spent on mortgage-backed securities.

Lagarde put the United States in the middle of "three speeds" of economic progress.

The first speed was represented by emerging and developing markets that were "well prepared, and entered the (2008 financial) crisis from positions of strength -- with sound policies under their belts."

"Think East Asia, for example," she said.

The United States, she said, "has made rapid and substantial progress in repairing its financial system, as well as the household debt situation." In addition, "credit conditions, housing markets, and employment have begun to tilt up."

What the United States had to face at this point was its "public finances appear unbalanced."

Lagarde advocated for a slower approach to government debt than what is called for in the automatic spending cuts referred to as sequestration.

"Yes, the fiscal cliff has been avoided. But this year, fiscal adjustment is still outsized, at 1 3/4 percent of gross domestic product.

"Sequestration alone -- if not reversed -- could cut a half percent of GDP from growth," she said.

Lagarde said the third "speed" of economic progress was represented by Japan, where the economy has been hampered by a prolonged period of deflation, and the eurozone, where government debt and continued troubles with banks are holding back the recovery.

In Europe, "because of insufficient financial repair, monetary policy is spinning its wheels," she said, "meaning that low interest rates are not translating into affordable credit for people who need it."

"The plumbing is clogged up, and we are seeing more financial fragmentation. Across the European periphery, credit has contracted by 5 percent since the onset of the crisis, hitting small and medium-sized enterprises particularly hard," Lagarde said.

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