In this environment, a considerable degree of economic slack, especially in the labour market, is likely to persist over the projection period, bringing inflation to very low rates.
The Federal Reserve should continue to support activity by expanding the scale of its quantitative easing operations, if needed. The authorities should also go ahead with the planned measures to remove impaired securities from banks' balance sheets. While the large fiscal stimulus is needed to support domestic demand in the next several quarters, once the recovery is firmly in place fiscal sustainability should be restored by reducing the budget deficit and tackling the challenge of rising entitlement spending.
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©OECD Observer No 274, July 2009