The US Federal Reserve on Wednesday warned of significant risks to the already weak US economy and launched a new plan to lower long-term borrowing costs and bolster the battered housing market.
The US central bank said it would sell US$400 billion of short-term Treasury bonds to buy the same amount of longer-term US government debt, its latest attempt to kickstart growth that slowed to a crawl over the first half of the year.
Apparently spooked by the central bank’s dismal outlook for the economy, US stocks sold off. The Standard & Poor’s 500 index closed down nearly 3 percent.
Prices for long-term government debt rose, pushing yields lower — a sign the measures were more aggressive than some investors had expected. The yield on the benchmark 10-year note dropped as low as 1.856 percent, the lowest in more than 60 years.
“Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated,” the Fed said in a statement after a two-day meeting. “There are significant downside risks to the economic outlook, including strains in global financial markets.”
The Fed also intensified its efforts to shore up the housing market by pledging to reinvest proceeds from maturing housing-related debt it holds back into the mortgage market. Analysts said the Fed’s actions might not have a great impact, even if they did lower long-term interest rates.
“The cost of borrowing simply isn’t the problem,” said Paul Ashworth, an economist at Capital Economics in Toronto. “Businesses don’t have the confidence to invest and half of all mortgage borrowers don’t have the home equity needed to refinance at lower rates.”
The portfolio retooling plan stops short of an outright expansion of the Fed’s holdings — sometimes referred to as quantitative easing — of the type that has drawn harsh criticism domestically and internationally for sowing the seeds of inflation and debasing the dollar.
However, some analysts expect the move will be one in a series of steps the Fed takes to help the economy. The Fed could cut the rate it pays banks for reserves parked at the central bank, which might free up lending, or promise not to raise rates until unemployment drops to a certain level.
Not all policymakers were on board with the Fed’s latest move. The same three officials that had dissented against a decision last month to bolster a low interest rate pledge also opposed Wednesday’s move. Mohamed El-Erian, co-chief investment officer at PIMCO, the world’s biggest bond fund, said the combination of dissents and a gloomier outlook pointed to a growing policy divide.
The Fed had already embarked far down one of the most aggressive monetary easing paths on record. It cut overnight interest rates to near zero in December 2008 and then moved to more than triple its balance sheet through a series of bond purchases.
After its last meeting on Aug. 9, the Fed said it expected to hold rates at rock-bottom levels at least until the middle of 2013, drawing the trio of dissents.
Critics say the monetary easing campaign has failed to produce results and warn it could actually cause damage by fueling inflation and debasing the dollar.
“We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the US economy,” Republican congressional leaders said in a letter to Federal Reserve Chairman Ben Bernanke, which they released on Tuesday.
BUSINESS UPDATE: The iPhone assembler said operations outlook is expected to show quarter-on-quarter and year-on-year growth for the second quarter Hon Hai Precision Industry Co (鴻海精密) yesterday reported strong growth in sales last month, potentially raising expectations for iPhone sales while artificial intelligence (AI)-related business booms. The company, which assembles the majority of Apple Inc’s smartphones, reported a 19.03 percent rise in monthly sales to NT$510.9 billion (US$15.78 billion), from NT$429.22 billion in the same period last year. On a monthly basis, sales rose 14.16 percent, it said. The company in a statement said that last month’s revenue was a record-breaking April performance. Hon Hai, known also as Foxconn Technology Group (富士康科技集團), assembles most iPhones, but the company is diversifying its business to
Apple Inc has been developing a homegrown chip to run artificial intelligence (AI) tools in data centers, although it is unclear if the semiconductor would ever be deployed, the Wall Street Journal reported on Monday. The effort would build on Apple’s previous efforts to make in-house chips, which run in its iPhones, Macs and other devices, according to the Journal, which cited unidentified people familiar with the matter. The server project is code-named ACDC (Apple Chips in Data Center) within the company, aiming to utilize Apple’s expertise in chip design for the company’s server infrastructure, the newspaper said. While this initiative has been
GlobalWafers Co (環球晶圓), the world’s No. 3 silicon wafer supplier, yesterday said that revenue would rise moderately in the second half of this year, driven primarily by robust demand for advanced wafers used in high-bandwidth memory (HBM) chips, a key component of artificial intelligence (AI) technology. “The first quarter is the lowest point of this cycle. The second half will be better than the first for the whole semiconductor industry and for GlobalWafers,” chairwoman Doris Hsu (徐秀蘭) said during an online investors’ conference. “HBM would definitely be the key growth driver in the second half,” Hsu said. “That is our big hope
The consumer price index (CPI) last month eased to 1.95 percent, below the central bank’s 2 percent target, as food and entertainment cost increases decelerated, helped by stable egg prices, the Directorate-General of Budget, Accounting and Statistics (DGBAS) said yesterday. The slowdown bucked predictions by policymakers and academics that inflationary pressures would build up following double-digit electricity rate hikes on April 1. “The latest CPI data came after the cost of eating out and rent grew moderately amid mixed international raw material prices,” DGBAS official Tsao Chih-hung (曹志弘) told a news conference in Taipei. The central bank in March raised interest rates by