Posted on 06/25/2012 3:58:45 PM PDT by 1rudeboy
THE Federal Reserve cannot be accused of sitting on its hands. On June 20th it announced its seventh instalment of unconventional monetary policy since running out of orthodox ammunition in late 2008, when short-term interest rates fell, in effect, to zero. In its latest salvo, the Fed said it would purchase $267 billion of long-term bonds by the end of the year, paid for from the proceeds of sales of short-term bonds in its portfolio.
The move extends a programme, nicknamed Operation Twist, announced last autumn and due to expire this month, under which the Fed has swapped $400 billion of short-term bonds for long-term ones. Previous initiatives have included purchasing bonds with newly created money (“quantitative easing”, or QE), reinvesting the proceeds of maturing bonds, and verbally committing to keeping rates near zero for ever longer periods. All are designed to drag long-term interest rates down in the hope of stimulating demand.
Like its predecessors, this latest round of monetary easing was motivated by the economy’s failure to grow as quickly as the Fed had forecast. Members of the Federal Open Market Committee (FOMC), the Fed’s main policymaking body, now expect growth of between 1.9% and 2.4% this year, down sharply from their April forecast of growth between 2.4% and 2.9%. This time a year ago, FOMC members were expecting growth of about 3.5% in 2012.
They also downgraded their outlook for the next two years. They expect almost no improvement in unemployment, now 8.2%, in 2013. And although the Fed set an inflation target of 2% in January, many Fed officials apparently expect to undershoot it between now and 2014.
The big question, given these downbeat forecasts, is why the Fed has not acted even more aggressively. The pessimistic answer is that it cannot do more. In theory, QE allows unlimited purchases of debt, of many different flavours. But Ben Bernanke, the Fed chairman, frets over the risks of doing so: a bigger balance-sheet that is harder to shrink later; impaired markets; and financial instability, a euphemism for bubbles. What the Fed would really like, he said, is for Europe to fix its crisis and America’s politicians to avoid the “fiscal cliff”, the near-simultaneous squeeze of tax increases and spending cuts programmed to occur at year-end.
A more optimistic answer is that, before long, the Fed will do more. Mr Bernanke promised the Fed will act if needed. At present, it is trying to sort through the economic data to figure out how much of the recent weakening in America’s economy is real, rather than a statistical fluke. It is also awaiting the outcome of events in Europe. Sadly, developments on both sides of the Atlantic seem likely to lead to more action.
What form would such action take? By the end of the year, when the Fed has sold the last of its short-term bonds, Operation Twist will have reached its limit. That suggests QE would be the favoured option, particularly if the Fed can wait until the election campaign is over and act without being accused of helping one candidate or another. If the economy really appears to be heading over the fiscal cliff, the Fed will not want to worsen the impact by holding back a monetary cushion.
The Econmist, a European-centered and liberal publication. was a very enthusiastic cheerleader of BHO2 back in 2008.
We cancelled our subscription due to there fiction-writing, something inexcusable in a publication dedicated to financial reporting.
Does it seem to anyone else whether they have changed?
The Economist was always “squishy,” in a Euro way. I used to subscribe to it during the late 80’s and early 90’s. I still enjoy reading it, in the sae way I enjoy reading our MSM.
Oh! You have a stronger stomach than I.
Sometimes when my family goes out to eat, I find a newspaper left on a booth seat. Out of boredom, I’ll read a bit of it, and that experience brings home to me exactly why we no longer bother with newspapaers.
The Economist editors always try to have it both ways - they support free markets and capitalism but also enthusiastically cheerlead for the expansion of the welfare state. I read it because, like the New York Times, it has all of the news - even if frequent reading between the lines is required.
Translation - The Fed is pretending they aren't Pavlov's dog every time the financial sector rings the dinner bell..
That allegedly educated and sophisticated men can use Orwellian terms like quantitative easing and “twist” for what is nothing more than old fashion debasement of the currency sickens me.
When coins were gold and silver....at least the King had to melt them down and add dross so he could reissue 3 coins for one smelted down. Now it is done with bond auctions and loans.
The fundamentals of our own economy, let alone Europe’s, are so far out of whack neither cannot recover. The debt based economies will all have to be reset....the only real question is will everybody be whacked to the same degree....or just the middle and working class again. Guess what the answer is. Go ahead. Guess.
While I always thought it a recipe for abuse, the “theory” behind debt based currency requires that the guardians are men of absolute character and integrity...acting always in the greater long term interests of us all, and never in the short term and certainly not for the narrow interests of a favored few.
The guardians haven’t been doing their jobs for at least 50 years. There is now a revolving door between Fed Reserve offices, the too big to fail banks, Wall Street and the regulatory agencies and government in general. It revolves so fast you can feel the breeze anywhere in the US.
The high finance boys have looted the banks and the economy. They made stupid bad investments....took huge short term gain on extreme high risk long term instruments (derivatives et al)and then when the pyramid scheme collapsed, they were made whole on principal and profits by raiding the full faith and credit of the US.....and with it shuffled off the bad debt to the taxpayer.....basically the middle and working class.
It looks like 2012 and 2013 will be 2008 and 2009 all over again only it will be trillions, and not mere billions in the wash.
Grrrrrrrr. I got to quit reading the news.
Are you talking about fractional-reserve banking?
They made stupid bad investments....took huge short term gain on extreme high risk long term instruments
I know, mortgages.
when the pyramid scheme collapsed, they were made whole on principal and profits
The banks lost tens of billions. No one made them whole.
by raiding the full faith and credit of the US.....
Yeah, those short term bank loans made the Treasury a decent profit. And prevented a collapse of the banking system.
and with it shuffled off the bad debt to the taxpayer
The taxpayer defaulting on mortgages gave bad debt to the banks, not the other way around.
“It looks like 2012 and 2013 will be 2008 and 2009 all over again only it will be trillions, and not mere billions in the wash.”
Not before they install The Taxman with big bucks, Hillary Romney, the plant.
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