US Fed’s new monetary stimulus to revive economyBy DPA, IANS
Wednesday, November 3, 2010
WASHINGTON - The US Federal Reserve Wednesday said it would restart the monetary printing presses, buying $600 billion in government debt over the next eight months in a bid to revive the stalled US economy.
It marks the US central bank’s first monetary intervention in the economy since an unprecedented buy-up of nearly $2 trillion in Treasury debt and mortgage securities in the aftermath of the 2008 financial crisis.
The Fed’s benchmark federal funds rate was also kept at a historic low of near zero percent, where interest rates have been held since December 2008. The Fed’s Open Market Committee agreed to the new moves in a 10-1 vote.
In a statement, the Fed committee cited the weak economy, high unemployment and low inflation among its reasons for the new move: “The pace of recovery in output and employment continues to be slow.”
The new monetary intervention, called “quantitative easing”, had been anticipated by economists for weeks, but was slightly larger than expected. Analysts surveyed by Bloomberg expected a Fed purchase of $460 billion, but over a shorter time frame of six months.
The Fed’s new purchase of long-term Treasury securities will be completed by the end of June 2011 at a rate of about $75 billion per month. The “pace” and “overall size” could be tweaked over the coming months as the Fed evaluates economic growth.
Quantitative easing is one of the central bank’s last tools to help pull the US economy out of a prolonged slump. The Fed hopes its buy-up of Treasury securities will further lower interest rates and drive investors back into spending in the private economy.
The US economy grew just two percent in the third quarter of this year and 1.7 percent in the April-June period. The jobless rate has remained stuck at 9.6 percent, and the Fed has also warned that inflation is lower than its target rate.
The Fed acknowledged that progress towards reducing unemployment and hitting its inflation benchmarks has been “disappointingly slow”.
But the new asset purchases also come with pitfalls. Some economists warn that the central bank’s action could too strongly fuel inflation or encourage new asset bubbles in the economy. It was a burst bubble in the housing market that sparked the 2008 crisis.
One member of the Fed board, Thomas Hoenig, disagreed with the decision. Hoenig, who has argued for months that the Fed should begin signalling that it will raise interest rates, said the “risks of additional securities purchases outweighed the benefits”.
The Fed’s move comes one day after Republicans retook control of the US House of Representatives in a landslide congressional election that dealt a major blow to President Barack Obama.
Obama’s room for fiscal stimulus is likely to be severely constrained by the Republican Party’s gains, leaving the central bank as one of the key institutions to pump fresh stimulus into the economy.