Is this a precipice for more QE3?
WASHINGTON - Fed chairman Ben Bernanke says that the U.S. job market remains weak despite three months of strong hiring and that the Federal Reserve's existing policies will help boost economic growth.
Bernanke's comments Monday to a group of economists in Arlington, Va., drove stocks higher. Many took his cautious words about the economy to mean the Fed is likely to stick to its plan to hold short-term interest rates at record lows through 2014.
Though the hiring has helped support consumer confidence and incomes, "we have not seen that in a persuasive way yet," Bernanke said. The Fed needs to "remain cautious" in deciding what its next moves should be, he said.
Further job gains will likely require stronger consumer and business demand, Bernanke said in a speech to the National Association for Business Economics' spring conference.
The association has 2,500 member economists who work for corporations, universities, the government and trade associations. Bernanke was addressing the group for the first time since 2008.
After Bernanke spoke, the Dow Jones industrial average rose 160 points, its third-biggest gain of the year. Broader indexes also increased.
The surge in hiring since December had led some economists to predict that the Fed might consider raising rates earlier than planned. But many took Bernanke's cautious tone as a firmer commitment to the late-2014 timetable.
And some viewed the speech as a signal that the Fed might take further steps, if the economy falters, to try to further drive down long-term borrowing rates. The goal would be to encourage more spending by consumers and businesses.
Robert Dye, chief economist at Dallas-based Comerica bank, said the Fed might extend a program of shuffling its investment portfolio to shift more of its holdings into long-term Treasuries. That could help lower long-term rates. Or the Fed could launch another round of bond buying.
"The chairman is very much keeping additional monetary-policy options on the table," said Dye, who attended the NABE conference.
Employers added an average of 245,000 jobs a month from December through February. The unemployment rate has fallen nearly a full percentage point since summer, to 8.3percent.
Still, the economy grew at an annual pace of just 3 percent in the October-December quarter. Economists think growth has slowed in the January-March quarter to around a 2 percent annual rate.
Bernanke said the combination of modest economic growth and rapid declines in unemployment is something of a puzzle. Normally, it takes roughly 4 percent annual growth to lower the rate by 1 percentage point over a year.
He offered some reasons for the unexpected decline in unemployment. Employers may be hiring rapidly because they cut too many jobs during the recession. He also said that government revisions may later show stronger economic growth over the past year.
But Bernanke cautioned that he doesn't expect the unemployment rate to keep falling at its current pace without much stronger growth and more robust hiring. He noted that the rate is still roughly 3 percentage points higher than its average over the 20 years preceding the recession.
"Despite the recent improvement, the job market remains far from normal," Bernanke said. "The number of people working and total hours worked are still significantly below pre-crisis peaks."
Bernanke also expressed concerns about the millions who have been out of work for more than six months. Those long-term unemployed Americans have made up more than 40 percent of the unemployed since December, he said. In the severe 1981-82 recession, long-term unemployment never exceeded 25 percent.
"Long-term unemployment is particularly costly to those directly affected, of course," Bernanke said. "But in addition, because of its negative effects on workers' skills and attachment to the labor force, long-term unemployment may ultimately reduce the productive capacity of our economy."
The Fed is concerned that the recovery could falter, as it did last year. Americans aren't seeing big pay increases. Gas prices are high. And Europe's debt crisis could weigh on the U.S. economy.
As long as inflation remains tame, analysts think the Fed will likely hold interest rates down to give the economy more support. Most economists don't think Fed officials will change their interest-rate policy at their next meeting on April 24-25 and will ease credit only if the economy slows further. While the recent job-market gains may continue, analysts think the record-low rates will continue as well, at least through this year. The Fed could reconsider the timetable next year, if the job gains prove more enduring.
But for now, most economists sense the Fed is committed to its plan.
"The clear tone of Chairman Bernanke's statement is that he is defending the Fed's current highly accommodative position," said David Jones, chief economist at DMJ Advisors.
by Martin Crutsinger - Mar. 26, 2012 06:27 PM AP Economics Writer
Bernanke says US job market weak despite gains
Showing posts with label QE2. Show all posts
Showing posts with label QE2. Show all posts
Tuesday, March 27, 2012
Saturday, February 5, 2011
Fed: Bond purchasing still vital for economy
WASHINGTON - The economy isn't growing fast enough to lower unemployment and still needs help from the Federal Reserve's $600 billion Treasury bond-purchase program.
That was the assessment Wednesday of Fed policymakers as they ended their first meeting of the year. The Fed made no changes to the program, and the decision was unanimous.
The decision came from a new lineup of voting members that includes two officials who have criticized the bond purchases. They have said the purchases could eventually ignite inflation or speculative buying in assets like stocks.
The bond-buying program is intended to lower rates on loans and boost stock prices, spurring more spending and invigorating the economy. Chairman Ben Bernanke faces the challenge of trying to boost hiring and growth without creating new economic threats.
The tax-cut package that took effect this month is easing pressure on the Fed to stimulate growth through its bond purchases.
The measure renewed income-tax cuts and cut workers' Social Security taxes, boosting their take-home pay.
Fed policymakers seemed to downplay recent improvements in the economy.
Instead, the Fed noted that the economy continues to faces risks. The biggest: that high unemployment will dampen consumer spending, which accounts for 70 percent of national economic activity.
Fed policymakers observed that the "economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor-market conditions."
One of the Fed's main reasons for launching the bond-buying program was to lower high unemployment, now at 9.4 percent.
The prospect that inflation will remain tame gives the Fed leeway to stick with its program, announced Nov. 3, to buy $600 billion worth of Treasury debt by the end of June.
by Jeannine Aversa Associated Press Jan. 27, 2011 12:00 AM
Fed: Bond purchasing still vital for economy
That was the assessment Wednesday of Fed policymakers as they ended their first meeting of the year. The Fed made no changes to the program, and the decision was unanimous.
The decision came from a new lineup of voting members that includes two officials who have criticized the bond purchases. They have said the purchases could eventually ignite inflation or speculative buying in assets like stocks.
The bond-buying program is intended to lower rates on loans and boost stock prices, spurring more spending and invigorating the economy. Chairman Ben Bernanke faces the challenge of trying to boost hiring and growth without creating new economic threats.
The tax-cut package that took effect this month is easing pressure on the Fed to stimulate growth through its bond purchases.
The measure renewed income-tax cuts and cut workers' Social Security taxes, boosting their take-home pay.
Fed policymakers seemed to downplay recent improvements in the economy.
Instead, the Fed noted that the economy continues to faces risks. The biggest: that high unemployment will dampen consumer spending, which accounts for 70 percent of national economic activity.
Fed policymakers observed that the "economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor-market conditions."
One of the Fed's main reasons for launching the bond-buying program was to lower high unemployment, now at 9.4 percent.
The prospect that inflation will remain tame gives the Fed leeway to stick with its program, announced Nov. 3, to buy $600 billion worth of Treasury debt by the end of June.
by Jeannine Aversa Associated Press Jan. 27, 2011 12:00 AM
Fed: Bond purchasing still vital for economy
Saturday, December 18, 2010
Fed Cites Unemployment in Sticking With Bond Plan
WASHINGTON (Dec. 14) -- The Federal Reserve said Tuesday it will maintain the pace of its $600 billion Treasury bond-buying program because a slowly improving economy is still too weak to bring down high unemployment.
Fed policymakers said they'll continue to monitor the bond-buying program. They left open the option of buying more bonds if the economy weakens, or less if it strengthens more than expected. The bond purchases are intended to lower long-term interest rates, lift stock prices and encourage higher spending.
But after the Fed issued its statement, Treasury prices sank, pushing their yields higher. The yield on the 10-year Treasury note jumped to 3.46 percent, its highest level since May and well above the 3.28 percent it traded at late Monday. The yield on the 10-year note helps set interest rates on many kinds of loans including mortgages.
Bond yields have been rising over the past two months as investors have raised their expectations for growth and inflation.
Stock investors were more focused Tuesday on encouraging news that showed the fifth straight month for retail sales gains. Stocks maintained their gains, but were little changed after the Fed's statement was released.
Critics contend that the Fed's bond-purchase program would do little to help the economy and could hurt it by unleashing inflation and speculative buying in assets like stocks.
But the Fed, in its statement, said it sees no threat of inflation. The Fed once again left its key short-term interest rate near zero, where it has been since December 2008. It also repeated its pledge to hold rates at those ultra-low levels for an "extended period."
A broad tax-cut plan emerging in Congress is easing pressure on the Fed to stimulate growth through its bond purchases.
In deciding to stay the course, the Fed said the "economic recovery is continuing, thought at a rate that has been insufficient to bring down unemployment."
Other than spotlighting the high unemployment rate, the Fed's statement was essentially the same as the one issued after policymakers adopted the bond-buying program at their Nov. 3 meeting.
Unemployment rose to 9.8 percent in November, a seven-month high. It has exceeded 9 percent for a record stretch of 19 months. And some economists predict it could climb to 10 percent by early next year.
Concerns about persistently high unemployment was the main motivation behind the Fed's decision to launch a second round of economic stimulus last month with the launch of the bond-buying program.
Progress on its goal of reducing unemployment has been "disappointingly slow," the Fed said Tuesday, echoing language it used last month.
Looking at other parts of the economy, the Fed said noted that consumer spending is increasing at a moderate pace, but still remains constrained by high unemployment, scant income gains, weak home values and hard-to-get credit.
Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, dissented on Tuesday for an eight straight meeting.
All year, Hoenig voted against the Fed's actions to shore up the economy - from holding rates at record lows near zero to the $600 billion bond-purchase program. Hoenig doesn't think the economy needs the extra help. He worried that the Fed's actions will trigger inflation and a wave of speculation in financial markets.
In the policy statement released after its meeting, the Fed didn't make mention of the tax cut plan, which is designed to bolster the economy.
Key elements of the tax-cut plan include: extending 2001 and 2003 income tax cuts for two years; renewing long-term unemployment benefits for 13 more months; and reducing workers' Social Security taxes in 2011. Economists say it will boost spending by individuals and businesses. That will strengthen growth and lead companies to hire more.
"That surely puts less of the burden to boost growth on the Fed," Paul Dales, economist at Capital Economics, said of the tax cut package.
Even so, Dales and other economists believe the Fed will carry out its $600 billion purchases of government bonds by the end of June, as scheduled.
"With the jobless rate at 9.8 percent, the economy needs all the help it can get," said Sung Won Sohn, economist at California State University.
But if the economy gains momentum next year, it is possible the Fed could reduce its $600 billion program, he said.
The Fed's next meeting is on Jan. 25-26.
by Jeannine Aversa Associated Press December 14, 2010
Fed Cites Unemployment in Sticking With Bond Plan
Fed policymakers said they'll continue to monitor the bond-buying program. They left open the option of buying more bonds if the economy weakens, or less if it strengthens more than expected. The bond purchases are intended to lower long-term interest rates, lift stock prices and encourage higher spending.
But after the Fed issued its statement, Treasury prices sank, pushing their yields higher. The yield on the 10-year Treasury note jumped to 3.46 percent, its highest level since May and well above the 3.28 percent it traded at late Monday. The yield on the 10-year note helps set interest rates on many kinds of loans including mortgages.
Bond yields have been rising over the past two months as investors have raised their expectations for growth and inflation.
Stock investors were more focused Tuesday on encouraging news that showed the fifth straight month for retail sales gains. Stocks maintained their gains, but were little changed after the Fed's statement was released.
Critics contend that the Fed's bond-purchase program would do little to help the economy and could hurt it by unleashing inflation and speculative buying in assets like stocks.
But the Fed, in its statement, said it sees no threat of inflation. The Fed once again left its key short-term interest rate near zero, where it has been since December 2008. It also repeated its pledge to hold rates at those ultra-low levels for an "extended period."
A broad tax-cut plan emerging in Congress is easing pressure on the Fed to stimulate growth through its bond purchases.
In deciding to stay the course, the Fed said the "economic recovery is continuing, thought at a rate that has been insufficient to bring down unemployment."
Other than spotlighting the high unemployment rate, the Fed's statement was essentially the same as the one issued after policymakers adopted the bond-buying program at their Nov. 3 meeting.
Unemployment rose to 9.8 percent in November, a seven-month high. It has exceeded 9 percent for a record stretch of 19 months. And some economists predict it could climb to 10 percent by early next year.
Concerns about persistently high unemployment was the main motivation behind the Fed's decision to launch a second round of economic stimulus last month with the launch of the bond-buying program.
Progress on its goal of reducing unemployment has been "disappointingly slow," the Fed said Tuesday, echoing language it used last month.
Looking at other parts of the economy, the Fed said noted that consumer spending is increasing at a moderate pace, but still remains constrained by high unemployment, scant income gains, weak home values and hard-to-get credit.
Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, dissented on Tuesday for an eight straight meeting.
All year, Hoenig voted against the Fed's actions to shore up the economy - from holding rates at record lows near zero to the $600 billion bond-purchase program. Hoenig doesn't think the economy needs the extra help. He worried that the Fed's actions will trigger inflation and a wave of speculation in financial markets.
In the policy statement released after its meeting, the Fed didn't make mention of the tax cut plan, which is designed to bolster the economy.
Key elements of the tax-cut plan include: extending 2001 and 2003 income tax cuts for two years; renewing long-term unemployment benefits for 13 more months; and reducing workers' Social Security taxes in 2011. Economists say it will boost spending by individuals and businesses. That will strengthen growth and lead companies to hire more.
"That surely puts less of the burden to boost growth on the Fed," Paul Dales, economist at Capital Economics, said of the tax cut package.
Even so, Dales and other economists believe the Fed will carry out its $600 billion purchases of government bonds by the end of June, as scheduled.
"With the jobless rate at 9.8 percent, the economy needs all the help it can get," said Sung Won Sohn, economist at California State University.
But if the economy gains momentum next year, it is possible the Fed could reduce its $600 billion program, he said.
The Fed's next meeting is on Jan. 25-26.
by Jeannine Aversa Associated Press December 14, 2010
Fed Cites Unemployment in Sticking With Bond Plan
Sunday, December 5, 2010
How the Fed is Getting QE2 Wrong – The Anti Wealth Effect « blog maverick
The Wealth Effect on Individuals suggests that the more wealth people know or feel they have, the more likely they are to spend their money. Which in turn is good for the economy.
I’m no economist. Thankfully. I try to pay attention to what is happening with the economy and create observations based on experience and common sense. Based on that, I think the Fed is making a big mistake in how they are implementing their Quantitative Easing 2 policy.
Here is why: Companies are not spending money. Corporate cash balances at public companies are at an all time high.
When People feel like they are getting richer, that wealth doesn’t convey power to the vast majority of the population. They reward themselves for all their hard work and success with increasing their standard of living.
In today’s world, when companies accumulate cash they feel the exact opposite. A growing cash balance conveys a feeling of power to CEOs. The more cash in the bank, the more power with in their industry that CEOs feel that they have. It is not an accident that CEOs refer to their cash balances as a “war chest”. The more cash a company has , the bigger the industry sledgehammer they have with which to make acquisitions, buy back stock and most importantly increase their own personal wealth through a rising stock price.
Not only does a big cash balance convey power to the CEO, but it also acts as a foundation for a stock price. Analysts are quick to justify Apple’s stock price by pointing to the fact that 17pct of Apple’s market cap is in cash. Steve Jobs has been quick to point out that there is no reason to spend their “war chest” because of the opportunity value the cash presents for acquisitions in a very competitive industry.
Jobs doesn’t chase stock price increases. Most CEOs do. The same personal wealth greed that pushed companies to over leverage (only to be deleveraged) is now pushing companies to aggregate as much cash as possible. With cash you can buy back stock at any time, increasing the company’s stock price and your personal wealth.
With cash in the bank, you don’t have to pay to repatriate cash from overseas . You already have the cash you need.
With cash you can lay off people to increase earnings per share, knowing that if you make a mistake, you have the cash to fix it.
With cash you can borrow all the money you need at barely breathing interest rates.
Companies are not holding on to cash because of fear of political and tax uncertainty. Companies are holding on to cash because of the power it offers and the opportunity to increase personal wealth.
All that cash is sitting in the bank earning NOTHING. Economists would tell you that if you can earn more from deploying cash than by hoarding it, you should deploy it. Not true. In this age of CEOs, power trumps return on cash every time.
If the Fed thinks that creating money to make it easier for companies to borrow money is going to stimulate the economy, they are wrong.
They are simply making it easier for companies to hoard cash.
What should the Fed do ? I’m not sure the fed can provide the solution. I don’t think they have the authority to encourage or penalize companies into using their cash. The way to get companies to spend their cash is to make it hard for them to spend their “warchests” in manners that only serve to increase their personal wealth. As i wrote several years ago:
How to Tax Wealth = Earned vs Found Money
Aug 26th 2008 4:41PM
When you go to work, whether you get paid by the hour, or on commission, tips or by salary, you earn every penny of it. The operative word being earned.
When you invest your own sweat equity and/or money to create a company, the operative word being create, you earn every penny of it.
I think Obama is about to make a HUGE misake, if elected, by increasing taxes on EARNED income of 250k or more. 250k does not make you rich, particularly if you live in a city, say New York City, with a huge cost of living. 250k does not make you rich if you are 60 years old, hoping not to get laid off and holding on to your salary long enough to have enough in the bank to retire. 250k does not make you rich if you have 3 kids near or at college age.
The disparity in wealth in this country does not come on the backs of people making 250k, or even 500k or 1mm per year FROM THEIR JOBS. The ever increasing delta between the rich and everyone else does not come from EARNED INCOME at all. It comes from found money.
Found money is when an internet bubble hits and the options you got for 1 dollar are sold for 250. It comes from buying a stock for $1 and seeing it turn into a “10 bagger”. It comes from hitting the lottery. It doesn’t matter whether you were smart or lucky, it is money you FOUND based on good fortune.
When I sold broadcast.com does anyone seriously think I would have cared if the tax on my FOUND money was 10pct or 20pct more ? Hell no. Would I have made any decisions differently, HELL NO.
I dont have access to financial data, or maybe Im just too lazy to find it, to know how much income in this country is found money. Capital gains earned from limited risk capital. Things like stock options awards sold. I dont know what the number is, but its found money and could be taxed higher. If Steve Jobs gives himeself 1mm Apple options at a buck or two apiece, and he sells them for $175 dollars each, would anything about his actions change if that FOUND income were taxed at 20pct higher rate ? Sure Steve Jobs busts his ass to increase the output of Apple Computer. But his ass busting does really change the multiple or base price assigned to the stock. Thats a function of the market and market trends.
Im not the economist, fortunately, but if we can arbitrarily assign taxation to given income levels, we can arbitrarily define what constitutes FOUND MONEY.
I would do the following:
if an individual, in any given year, has short term capital gains of more than 1mm dollars, AND that gain is 200pct or more (remember, for your taxes, you list cost and sales price, so gain percentage would not be difficult to calculate) you pay the existing cap gains tax, plus you get hit with a “You got lucky tax of 30pct”
For long term capital gains, it would be more difficult, but I would tax it at a gain greater than $1mm or a basis equal to the compounded CPI for every year held, against a 300pct increase and reduce the GOT LUCKY percentage to 20pct.. So in the Steve Jobs example, if he had held his stock for 5 years, then sold it at 175mm a share, he would pay tax on 175mm in gains at the current rate, then a GOT LUCKY tax at 20pct of $175mm or $35mm dollars.
Will it piss off rich people like me.. Yep. But it wont affect our behavior at all. At some point you know the difference between FOUND MONEY and EARNED INCOME. That stock that went crazy, the options or warrants you got that vested just at the right time, thats where people get in to the Fuck You money territory, and most if not all recognize that paying taxes at that level is a great problem to have.
The transactions this GET LUCKY tax is most likely to impact
So what does the blogosphere think about all of this ?
=
by Mark Cuban November 8, 2010
Sunday, November 21, 2010
Saturday, November 13, 2010
Fed to Buy $600 Billion of Treasurys - WSJ.com
The Federal Reserve, in a dramatic effort to rev up a "disappointingly slow" economic recovery, said it will buy $600 billion of U.S. government bonds over the next eight months to drive down interest rates and encourage more borrowing and growth.
Many outside the Fed, and some inside, see the move as a 'Hail Mary' pass by Fed Chairman Ben Bernanke. He embraced highly unconventional policies during the financial crisis to ward off a financial-system collapse. But a year and a half later, he confronts an economy hobbled by high unemployment, a gridlocked political system and the threat of a Japan-like period of deflation, or a debilitating fall in consumer prices.
The Fed left open the possibility of doing more if growth and inflation don't perk up in the months ahead. The $75 billion a month in new purchases of Treasury debt come on top of $35 billion a month the Fed is expected to spend to replace mortgage bonds in its portfolio that are being retired.
The Dow Jones Industrial Average Wednesday continued a climb that began in August, when Mr. Bernanke signaled that a bond-buying program was possible. The index rose 26.41 points, or 0.24%, to a two-year high of 11215.13. Yields on 10-year notes, which have fallen from just under 3% in early August, finished the day at 2.62%. The value of the dollar has fallen in anticipation of a flood of new American currency hitting global financial markets.
These market reactions are seen inside the Fed as being stimulative to the economy. In addition to the impact of cheaper borrowing, higher stock prices could encourage households to spend more and businesses to invest more, and a weak dollar could make U.S. exports cheaper and thus easier to sell abroad.
"All of these things are part of what the Fed is trying to do, and I think it has been successful," said Laurence Kantor, head of research at Barclays Capital in New York.
The moves announced Wednesday were broadly in line with the expectations of economists, although some had expected total spending to be a bit less and to come more quickly.
There are immense unknowns and many risks.
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Rate changes since 2004 in dozens of countries.
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In essence, the Fed now will print money to buy as much as $900 billion in U.S. government bonds through June—an amount roughly equal to the government's total projected borrowing needs over that period.
In normal times, a Fed spending spree on government bonds would be highly inflationary, because it would flood the economy with money and raise worries about too much government spending. The mere worry of too much inflation in financial markets could drive long-term interest rates higher and cause the Fed's program to backfire.
EXPERIENCE WSJ PROFESSIONALEditors' Deep Dive: Questioning QE's Impact
DOW JONES INTERNATIONAL NEWS
IMF Official: U.S. Fed QE May Have Limited Impact
ASSOCIATED PRESS NEWSWIRES
World's Central Banks Keep an Eye on the Dollar
DOW JONES INTERNATIONAL NEWS
Japan's QE Fails to Spur Demand
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Prices in commodities markets have marched higher since late August. Crude-oil futures prices, for instance, have risen 15% since then, to $85 per barrel.
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“I hope Home Depot is having a sale on wheelbarrows, because I'm going to need a new one to carry my money into the grocery store for a loaf of bread soon. ”
—Misty Lane
Michael Pence, a top Republican in the House of Representatives, said the Fed was taking an "incalculable risk."
Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, who described the move before the meeting as a "bargain with the devil," was the lone dissenter in a 10-1 vote of the Fed's policy committee. He said the risks of additional government bond purchases outweighed the benefits.
But Fed officials are betting that inflation is still being pushed strongly in the other direction because there is so much spare capacity in the economy—including an unemployment rate at 9.6%, a real-estate landscape littered with more than 14 million unoccupied homes, and manufacturers operating with 28% of their productive capacity going unused.
The latest economic data suggest the economy is expanding, but not at a very fast pace. Figures Wednesday from payroll firm Automatic Data Processing Inc. and consultancy Macroeconomic Advisers showed that companies added 43,000 private-sector jobs in October.
In a post-meeting statement, the Fed said it was acting to "promote a stronger pace of economic recovery" and to ensure that inflation, now running at around a 1% annual rate, moves toward the Fed's informal objective of 2%.
This is the Fed's second experiment with a big bond-buying program. Between January 2009 and March of this year, the central bank purchased roughly $1.7 trillion worth of government and mortgage bonds. That move also sparked worries about inflation, which so far hasn't materialized. The bond-buying program is known in some corners as quantitative easing.
"This approach eased financial conditions in the past and, so far, looks to be effective again," Mr. Bernanke said in an opinion piece scheduled to be published in Thursday's Washington Post.
By buying a lot of bonds and taking them off the market, the Fed expects to push up their prices and push down their yields. The Fed hopes that will result in lower interest rates for homeowners, consumers and businesses, which in turn will encourage more of them to borrow, spend and invest. The Fed figures it will also drive investors into stocks, corporate bonds and other riskier investments offering higher returns.
The Fed normally would push down short-term interest rates when the economy is weak. But it has already pushed those rates to near zero, leaving it to resort to unconventional measures.
The planned bond buying, by Fed calculations, will have an economic impact roughly equivalent to cutting short-term interest rates by three-quarters of a percentage point.
The Fed will be buying bonds with maturities of as long as 30 years, but will concentrate its purchases in the five-year to six-year range. Some bond-market participants were disappointed with that decision because they wanted the Fed to focus on buying longer-term bonds. But doing so could leave the Fed more exposed to losses if interest rates rise.
There are other risks.
Critics say a weaker dollar isn't in U.S. interests, and that a swift decline in the value of the currency could drive up U.S. interest rates. Fed officials have seen the dollar's drop to date as being orderly and supportive of growth.
Some critics also argue that by purchasing government bonds, the Fed is taking pressure off the White House and Congress to address long-term deficit problems, but Mr. Bernanke is trying to avoid such political calculations.
U.S. trading partners, particularly in the developing world, openly worry that the Fed's money pumping is creating inflation in their own economies and a risk of asset-price bubbles. Fed officials say a strong U.S. economy is in everyone's interest.
In recent weeks, China, India, Australia and others have pushed their own interest rates higher to tamp down inflation forces. Authorities in Brazil and Thailand have imposed taxes on capital flooding into their economies to prevent an asset bubble. And Japanese authorities have intervened in currency markets to prevent the yen from appreciating too much against the dollar.
There is an alternate risk that officials wrestled with in their latest two-day meeting, which concluded before lunch Wednesday: They might not be doing enough.
Economists at the research firm Macroeconomic Advisers LLC calculated that even if the Fed purchases $1.5 trillion worth of Treasury bonds—which some economists say remains a distinct possibility—it would only bring the unemployment rate down by 0.2 percentage points by the end of 2011.
"This instrument doesn't give them a lot of power, especially on the scale which they're prepared to use," said Laurence Meyer, of Macroeconomic Advisers, after the decision.
For the Fed, it was a middle ground that emerged after months of internal debate about the costs and benefits of restarting the program.
by Jon Hilsenrath The Wall Street Journal November 4, 2010
Fed to Buy $600 Billion of Treasurys - WSJ.com
Many outside the Fed, and some inside, see the move as a 'Hail Mary' pass by Fed Chairman Ben Bernanke. He embraced highly unconventional policies during the financial crisis to ward off a financial-system collapse. But a year and a half later, he confronts an economy hobbled by high unemployment, a gridlocked political system and the threat of a Japan-like period of deflation, or a debilitating fall in consumer prices.
The Fed left open the possibility of doing more if growth and inflation don't perk up in the months ahead. The $75 billion a month in new purchases of Treasury debt come on top of $35 billion a month the Fed is expected to spend to replace mortgage bonds in its portfolio that are being retired.
The Dow Jones Industrial Average Wednesday continued a climb that began in August, when Mr. Bernanke signaled that a bond-buying program was possible. The index rose 26.41 points, or 0.24%, to a two-year high of 11215.13. Yields on 10-year notes, which have fallen from just under 3% in early August, finished the day at 2.62%. The value of the dollar has fallen in anticipation of a flood of new American currency hitting global financial markets.
These market reactions are seen inside the Fed as being stimulative to the economy. In addition to the impact of cheaper borrowing, higher stock prices could encourage households to spend more and businesses to invest more, and a weak dollar could make U.S. exports cheaper and thus easier to sell abroad.
"All of these things are part of what the Fed is trying to do, and I think it has been successful," said Laurence Kantor, head of research at Barclays Capital in New York.
The moves announced Wednesday were broadly in line with the expectations of economists, although some had expected total spending to be a bit less and to come more quickly.
There are immense unknowns and many risks.
Global Rates
Rate changes since 2004 in dozens of countries.
View Interactive
More photos and interactive graphics
In essence, the Fed now will print money to buy as much as $900 billion in U.S. government bonds through June—an amount roughly equal to the government's total projected borrowing needs over that period.
In normal times, a Fed spending spree on government bonds would be highly inflationary, because it would flood the economy with money and raise worries about too much government spending. The mere worry of too much inflation in financial markets could drive long-term interest rates higher and cause the Fed's program to backfire.
EXPERIENCE WSJ PROFESSIONALEditors' Deep Dive: Questioning QE's Impact
DOW JONES INTERNATIONAL NEWS
IMF Official: U.S. Fed QE May Have Limited Impact
ASSOCIATED PRESS NEWSWIRES
World's Central Banks Keep an Eye on the Dollar
DOW JONES INTERNATIONAL NEWS
Japan's QE Fails to Spur Demand
Access thousands of business sources not available on the free web. Learn More
Prices in commodities markets have marched higher since late August. Crude-oil futures prices, for instance, have risen 15% since then, to $85 per barrel.
Journal CommunityDISCUSS
“I hope Home Depot is having a sale on wheelbarrows, because I'm going to need a new one to carry my money into the grocery store for a loaf of bread soon. ”
—Misty Lane
Michael Pence, a top Republican in the House of Representatives, said the Fed was taking an "incalculable risk."
Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, who described the move before the meeting as a "bargain with the devil," was the lone dissenter in a 10-1 vote of the Fed's policy committee. He said the risks of additional government bond purchases outweighed the benefits.
But Fed officials are betting that inflation is still being pushed strongly in the other direction because there is so much spare capacity in the economy—including an unemployment rate at 9.6%, a real-estate landscape littered with more than 14 million unoccupied homes, and manufacturers operating with 28% of their productive capacity going unused.
The latest economic data suggest the economy is expanding, but not at a very fast pace. Figures Wednesday from payroll firm Automatic Data Processing Inc. and consultancy Macroeconomic Advisers showed that companies added 43,000 private-sector jobs in October.
In a post-meeting statement, the Fed said it was acting to "promote a stronger pace of economic recovery" and to ensure that inflation, now running at around a 1% annual rate, moves toward the Fed's informal objective of 2%.
This is the Fed's second experiment with a big bond-buying program. Between January 2009 and March of this year, the central bank purchased roughly $1.7 trillion worth of government and mortgage bonds. That move also sparked worries about inflation, which so far hasn't materialized. The bond-buying program is known in some corners as quantitative easing.
"This approach eased financial conditions in the past and, so far, looks to be effective again," Mr. Bernanke said in an opinion piece scheduled to be published in Thursday's Washington Post.
By buying a lot of bonds and taking them off the market, the Fed expects to push up their prices and push down their yields. The Fed hopes that will result in lower interest rates for homeowners, consumers and businesses, which in turn will encourage more of them to borrow, spend and invest. The Fed figures it will also drive investors into stocks, corporate bonds and other riskier investments offering higher returns.
The Fed normally would push down short-term interest rates when the economy is weak. But it has already pushed those rates to near zero, leaving it to resort to unconventional measures.
The planned bond buying, by Fed calculations, will have an economic impact roughly equivalent to cutting short-term interest rates by three-quarters of a percentage point.
The Fed will be buying bonds with maturities of as long as 30 years, but will concentrate its purchases in the five-year to six-year range. Some bond-market participants were disappointed with that decision because they wanted the Fed to focus on buying longer-term bonds. But doing so could leave the Fed more exposed to losses if interest rates rise.
There are other risks.
Critics say a weaker dollar isn't in U.S. interests, and that a swift decline in the value of the currency could drive up U.S. interest rates. Fed officials have seen the dollar's drop to date as being orderly and supportive of growth.
Some critics also argue that by purchasing government bonds, the Fed is taking pressure off the White House and Congress to address long-term deficit problems, but Mr. Bernanke is trying to avoid such political calculations.
U.S. trading partners, particularly in the developing world, openly worry that the Fed's money pumping is creating inflation in their own economies and a risk of asset-price bubbles. Fed officials say a strong U.S. economy is in everyone's interest.
In recent weeks, China, India, Australia and others have pushed their own interest rates higher to tamp down inflation forces. Authorities in Brazil and Thailand have imposed taxes on capital flooding into their economies to prevent an asset bubble. And Japanese authorities have intervened in currency markets to prevent the yen from appreciating too much against the dollar.
There is an alternate risk that officials wrestled with in their latest two-day meeting, which concluded before lunch Wednesday: They might not be doing enough.
Economists at the research firm Macroeconomic Advisers LLC calculated that even if the Fed purchases $1.5 trillion worth of Treasury bonds—which some economists say remains a distinct possibility—it would only bring the unemployment rate down by 0.2 percentage points by the end of 2011.
"This instrument doesn't give them a lot of power, especially on the scale which they're prepared to use," said Laurence Meyer, of Macroeconomic Advisers, after the decision.
For the Fed, it was a middle ground that emerged after months of internal debate about the costs and benefits of restarting the program.
by Jon Hilsenrath The Wall Street Journal November 4, 2010
Fed to Buy $600 Billion of Treasurys - WSJ.com
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