Market Leader informed
On Wednesday, Nov 3rd, the US Fed Reserve announced the intension of pouring extra funds into the US economy in order to accelerate the slow pace of its recovery. According to the press release, each month until the 2nd quarter of 2010 $75B will be allocated to buy treasury bonds (the total sum is estimated at $600B).
Besides, it is going to spend extra $250-300B ($35B a month) on refreshing the investment portfolio through changing those mortgage bonds that are going to expire soon. However the members of FOMC do not deny the possibility of increasing the sum if the measures fail to lower the unemployment rate (9.6%), to increase the inflation rate (now it is slightly higher than1% against the predicted 2% per year) and to considerably consolidate the economy.
These measures caused experts’ ambiguous estimations. Dow Jones Newswires calls the purchases of the treasury bonds a disputable measure of solving the economic problems as currently the US economy shows growth, even though it is slow, and the financial markets are relatively calm as opposed to the crisis situation in 2008 when the same measures helped to save the American economy from the deepening crisis: from December 2008 till March 2010 the Fed Reserve was buying the bonds to the sum of $1.75 trillion.
The Federal Reserve’s motivation is the following: as the second means of economic regulation is (interest rates) are lowered down to the minimal level possible (0%-0,25%), numerous companies will be increasing their investment capital, investing in risky assets - shares and corporate bonds – the consumers will increase their spending while the house-owners will be able to refinance the credits. On the other hand, as the result of such actions the US dollar will lose in value a little, which in its turn will affect the export-and-import processes.
Despite the fact that in June 2009 the US economy regained its upswing after the crisis of 2008, experts consider it to be too slow. The high level of unemployment restrains the consumer spending and freezes the consumer prices. Over the 3 quarters of 2010 the basic inflation rate stays at the record low level of less than 1.2%. Besides, it is obvious that there won’t be any instant positive changes in the short run.
In connection with all the above-mentioned the Fed Reserve authorities confirmed their promises to leave the short-term interest rates at the same level over the long term. It is very likely that they will remain intact until the end of 2011.
Besides, according to the current situation, the Fed Reserve’s new forecast for the perspectives of the national economy in 2011 will be worse than the June’s one. Its details will be provided in the FOMC meeting minutes on Nov 24th. However even now it becomes clear that the June forecast concerning an increase in the inflation rate up to 4% and a decline in the unemployment rate down to 8.5% in 2011 is unlikely to come true. In comparison with the 2nd quarter of 2010 the economy grained only 2% in the 3rd quarter year-over-year (in the 2nd quarter – 1.7%). Such an increase won’t be able to reduce the unemployment in the near future. Previously experts predicted that on Nov 5th the unemployment-rate report will indicate no change, leaving the rate at 9.6%.
As the experts’ opinions on the $600B stimulation package differ (4 of the regional presidents of the Fed Reserve oppose these measures, considering that in this case the potential risks are greater than the potential profit). So we have nothing but to wait what is going to happen next.
Neither Fed Res experts, nor independent analysts can definitely prove or disprove the efficiency of purchasing the treasury bonds for the US economy. Some of them predict the “soap bubble” effect at the equity market (as it was in 2003-2004) or an inflation boom within the next few years if they fail to call in the printed extra money at the right time, when the tendency of the economy to rise will be stable enough. Anyway, the Fed Reserve has made a decision, so it remains to be seen what will come of it.
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Text: Alisa Kandeeva
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