Stocks plunge: four factors behind investor pessimism

2. Federal spending cuts could weaken the US recovery

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    US Federal Reserve Chairman Ben Bernanke testifies before a Senate Banking, Housing and Urban Affairs Committee hearing on Capitol Hill in Washington, July 21, 2011. Federal government cuts may weaken the economy, forcing the Fed to act with yet more easy-money policies.
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The deal that led to the acceptance of the debt-limit increase calls for at least $2.1 trillion in spending cuts over the next 10 years, with a planned $900 billion reduction starting in October. The timing of these cuts is particularly worrying in the wake of the recent slowdown in the economy, which could be made even worse by a pullback in government spending.

This may leave the Federal Reserve with little choice but to introduce another round of quantitative easing – QE III. The deeper the government cuts, the more pressure the Fed will feel to provide additional liquidity.

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