22 October 2010
US Fed poised to inject more liquidity into economy
NEW YORK: The US Federal Reserve is poised to inject more liquidity into the US economy.
Worried about high unemployment and weak lending activity, the central bank could announced, as early as next month, another round of bond purchases in a bid to lower long-term interest rates.
The policy - known as quantitative easing - is another emergency measure aimed at breathing life into the world's biggest economy.
As Americans prepare to go the polls on November 2 for the mid-term elections, economists are focusing more on the day after - November 3.
That is when the US Federal Reserve chairman Ben Bernanke and fellow Fed governors are due to meet to consider the next round of stimulative policy.
It is being called Quantitative Easing 2 (QE 2).
After buying up hundreds of billions of dollars of mortgage bonds and other securities, the Fed has signalled that new purchases of long term bonds to help bring down interest rates for businesses and homeowners is on the cards.
Their real worry is unemployment.
Cary Leahey, MD of Decision Economics said: "Right now, a near 10 per cent unemployment rate, a trillion dollar budget deficit are not only unacceptable to the American people, they are unacceptable to policy makers.
"And so the Fed is basically saying that we have got this lever, we think it works and we think it'll help reduce borrowing costs, at least marginal. So we are going to pull that lever again, starting sometime in November."
In the US, the policy is controversial. Some believe it will lead to demonstrations, like the ones during the financial crisis.
Many living on savings like the elderly will see their incomes drop, while those who borrow will see more profits.
There are also fears that inflation may shoot up and that there are few guarantees that the policy will work
Leahey said: "The Fed is saying if we reduce the borrowing cost, we will help pump up the economy. But if people are already so uncertain and so nervous, they don't care what their borrowing rates are, it won't do any good.
"So you can argue, and this is what the critics, and one of the reasons why the policy is so controversial, is that it's not abundantly clear it works. It's not fixing problems in the US economy, and you could be setting yourself up problems down the road."
QE also has an international dimension too.
By helping to lower long term rates, the dollar becomes less attractive and falls, making it weaker versus the Chinese yuan for instance.
This may be seen as a backdoor devaluation and could further increase tensions between Beijing and Washington at a time when currency and trade issues are already difficult.
The markets have already priced in another round of quantitative easing.
While there's no guarantee that this policy will work, and the Congress' deadlock over any stimulus, it seems the Fed policy is the only game in town. -
NEW YORK: The US Federal Reserve is poised to inject more liquidity into the US economy.
Worried about high unemployment and weak lending activity, the central bank could announced, as early as next month, another round of bond purchases in a bid to lower long-term interest rates.
The policy - known as quantitative easing - is another emergency measure aimed at breathing life into the world's biggest economy.
As Americans prepare to go the polls on November 2 for the mid-term elections, economists are focusing more on the day after - November 3.
That is when the US Federal Reserve chairman Ben Bernanke and fellow Fed governors are due to meet to consider the next round of stimulative policy.
It is being called Quantitative Easing 2 (QE 2).
After buying up hundreds of billions of dollars of mortgage bonds and other securities, the Fed has signalled that new purchases of long term bonds to help bring down interest rates for businesses and homeowners is on the cards.
Their real worry is unemployment.
Cary Leahey, MD of Decision Economics said: "Right now, a near 10 per cent unemployment rate, a trillion dollar budget deficit are not only unacceptable to the American people, they are unacceptable to policy makers.
"And so the Fed is basically saying that we have got this lever, we think it works and we think it'll help reduce borrowing costs, at least marginal. So we are going to pull that lever again, starting sometime in November."
In the US, the policy is controversial. Some believe it will lead to demonstrations, like the ones during the financial crisis.
Many living on savings like the elderly will see their incomes drop, while those who borrow will see more profits.
There are also fears that inflation may shoot up and that there are few guarantees that the policy will work
Leahey said: "The Fed is saying if we reduce the borrowing cost, we will help pump up the economy. But if people are already so uncertain and so nervous, they don't care what their borrowing rates are, it won't do any good.
"So you can argue, and this is what the critics, and one of the reasons why the policy is so controversial, is that it's not abundantly clear it works. It's not fixing problems in the US economy, and you could be setting yourself up problems down the road."
QE also has an international dimension too.
By helping to lower long term rates, the dollar becomes less attractive and falls, making it weaker versus the Chinese yuan for instance.
This may be seen as a backdoor devaluation and could further increase tensions between Beijing and Washington at a time when currency and trade issues are already difficult.
The markets have already priced in another round of quantitative easing.
While there's no guarantee that this policy will work, and the Congress' deadlock over any stimulus, it seems the Fed policy is the only game in town. -
