Fri, Nov 05, 2010 page10

• Fed takes bold step to bolster economy

  ‘DISAPPOINTINGLY SLOW’: Critics fear that the move might cause inflation, fuel asset bubbles in other countries and destabilize currencies, but the Fed fears deflation more

  • Reuters, WASHINGTON
  • • 
    • 
    • 

  The US Federal Reserve launched a fresh effort to support a struggling US economy on Wednesday, committing to buy US$600 billion in government bonds despite concerns the program could do more harm than good.

  The decision takes the Fed into largely uncharted waters and is aimed at further lowering borrowing costs for consumers and businesses still suffering in the aftermath of the worst recession since the Great Depression.

  The US central bank said it would buy about US$75 billion in longer-term Treasury bonds per month through the end of June next year, and could adjust purchases depending on the strength of the recovery.

  “The economy is slowly digging itself out of a deep hole,” said Brian Bethune, economist at IHS Global Insight in Lexington, Massachusetts.

  “The Fed is making the right moves here to nudge the pace up a little,” he said.

  Critics within and outside the central bank fear the Fed’s policy will lead to high inflation and worry that low interest rates in the US risk fueling asset bubbles in other countries and destabilizing currencies.

  However, with the US economy expanding at only a 2 percent annual pace in the third quarter of this year and the jobless rate seemingly stuck at around 9.6 percent, the Fed had come under pressure to do more to stimulate business activity.

  In the Fed’s post-meeting statement, policymakers described the economy as “slow,” and said employers remained reluctant to create jobs. They also called inflation “somewhat low.”

  “Progress toward [our] objectives has been disappointingly slow,” the Fed said, referring to its dual mandate to maintain price stability and foster maximum sustainable employment.

  Still, these domestic goals appeared to be creating troubles abroad. The prospect of ultra-low returns in the US have driven investors into higher-yielding emerging markets, pushing those currencies higher and sparking anxiety over a loss of export competitiveness.

  “We are all under attack by the relaxed monetary policy of the United States,” Colombian Finance Minister Juan Carlos Echeverry told investors on Tuesday.

  With 14.8 million Americans unemployed, factories operating well short of capacity and inflation well below the range the Fed would prefer, some officials at the central bank see the risk of a vicious deflationary cycle where consumers hold off on purchases, choking off economic growth.

  US Fed Chairman Ben Bernanke, in an opinion piece to be published in the Washington Post yesterday, said policymakers could not sit idly by given the anemic economic backdrop. He argued that fears that unconventional monetary policy would spark a future bout of inflation were “overstated.”

  “Inflation that is too low can pose risks to the economy — especially when the economy is struggling. In the most extreme case, very low inflation can morph into deflation, which can contribute to long periods of economic stagnation,” Bernanke wrote.

  The overall size of the bond buying program was slightly larger than the US$500 billion that many analysts had looked for, though the pace of monthly buying fell short of expectations for something around US$100 billion.

  Market reaction was initially volatile yesterday, but at the end of the day left the recent uptrend in stocks and downtrend in the US dollar intact.

  The Standard & Poor’s 500 index of US stocks rose just 0.37 percent after initial losses and the US dollar fell against the euro. US Treasury bond yields fell for shorter-dated maturities. Disappointment that the Fed did not expand buying to 30-year bonds led to a sharp rise in long-dated yields.

  While doubts lingered about the ability of bond purchases to kick start a moribund economy, there was a sense in the market that the Fed was open to doing more if the recovery remains sluggish.

  Nearly 90 percent of the Fed’s purchases will be of Treasuries with maturities ranging from two-and-a-half to 10 years, the New York Fed said, adding it would temporarily relax a rule limiting ownership by the Fed of any particular security to 35 percent.

  It said holdings would be allowed to rise above that threshold “only in modest increments.”
• Most Popular

  • 1

    Fertility rate falls to lowest globally

  • 2

    Minister warns Taiwanese about Chinese passports

  • 3

    ’Up to Xi’ on Taiwan, but would be ’very unhappy’ with a change in ’status quo’: Trump

  • 4

    China widens attack on Japan’s ‘nuclear threat’

  • 5

    Marine Corps unit receives M4A1 rifles, source says