MercoPress. South Atlantic News Agency

Fed decides to pump an additional 900 billion USD to the US economy

The US central bank building in Washington: In God we trust

The Federal Reserve announced Wednesday it will pump 600 billion US dollars into the US economy by the end of June next year to try and boost the fragile recovery. The stimulus equates 75 billion USD a month, slightly more than economists had expected.

The US economy grew by an annual rate of 2% between July and September, which is not enough to reduce high unemployment. Some analysts see QE as the last chance to get the US economy back on track.

To promote a stronger pace of economic recovery and to help ensure that inflation the Federal Open Market Committee decided to maintain its existing policy of reinvesting principal payments from its securities holding and in addition, “intends to purchase a further 600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about 75 billion per month”, said the Fed in its Wednesday release following a two day meeting.

Reinvestment of principal payments from agency debt and agency mortgage-backed securities into longer-term Treasury securities has been estimated in 250 billion to 300 billion USD over the same period.

Taken together this amounts to 850 billion to 900 billion USD of purchases of longer-term Treasury securities through the end of the second quarter. This would result in an average purchase pace of roughly 110 billion per month, representing about 75 billion per month associated with additional purchases and roughly 35 billion per month associated with reinvestment purchases.

The FOMC offered a disappointing outlook of the US economy in support of the additional liquidity boost.

The pace of recovery in output and employment continues to be slow: household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in non-residential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters, said the Fed.

With interest rates already close to zero (0 to 0.25%), which means the Fed cannot reduce rates any further in order to boost demand (the more traditional policy used by central banks to stimulate growth) it has been appealing to QE, which means creating money to buy government bonds.
This last announcement has been dubbed QE2, after the Fed pumped 1.75 trillion USD into the economy during the downturn in its first round of QE.

The US economy grew at an annualised rate of 2% between July and September and while this was an improvement on the 1.7% annualised growth seen between April and June, it was less than the 3.7% annualised growth recorded in the first three months of the year.

Together, these growth rates are below the historical rates posted by the US economy during recoveries from recession.

Another cause for concern is the fact that growth in business inventories made up more than two-thirds of the annualised 2% third-quarter growth - in other words, businesses simply re-stocking following the downturn.

Such modest rates of growth are having little impact on the high level of unemployment in the US, which currently stands at 9.6%. Official figures show that the economy lost 95,000 jobs in September, as public-sector cuts outpaced hiring by the private sector. This was almost double the figure for August, when 54,000 jobs were lost.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Sandra Pianalto; Sarah Bloom Raskin; Eric S. Rosengren; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

Voting against the policy was Thomas M. Hoenig. The chief executive of the Tenth District Federal Reserve Bank, at Kansas City believes the risks of additional securities purchases outweighed the benefits. Mr. Hoenig also was concerned that this continued high level of monetary accommodation increased the risks of future financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.