Fed Announces Further Stimulus: $600bn Government Bond Purchase

The United States Federal Reserve Bank (Fed) has announced it will purchase an additional 600bn USD of government bonds as a means of quantitative easing to lower the cost of borrowing, which totals 2.3tn USD or 1/6  of American GDP that has been injected into the economy since the recession.   The Fed will implement set amount in quantitative easing and stimulus through the end of June, 2011, which averages to 75bn USD per month, a sum that is greater than what some economists expected. Interestingly, leading economists views are still split between quantitative easing hurting the U.S. economy by causing an elevated inflation rate over time to the opposite where 600bn USD as not nearly being enough to stimulate the weakened economy.

Unfortunately, whether the additional quantitative easing has a desired effect on the economy as planned by the Fed will greatly influence President Barack Obama’s chance at reelection in 2012.  After last evening’s results at the 2010 Election, America’s discontent was visible through the changed panorama of both houses of Congress and a number of state Gubernatorial seats.  Whether this changed panorama of U.S. politics and the announced austerity plans of the Republicans in Washington will greatly impact the desired outcome of the Fed stimulus plan remains to be seen as many economists warn that austerity measures implemented prior to entering a strong recovery could send the U.S. economy into a double-dip recession.

Stay tuned!

Or, watch the video at BBC News.

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What Does the IMF Say About QE2?

Currently, there is speculation with regard to whether or not the quantitative easing or QE2, the Federal Reserve Bank’s next round of stimulus and decision to resume purchases of government securities, will help re-start the U.S. Economy.  Several arguments for and against another round of quantitative easing ranging from what the U.S. needs to complete economic disaster.  According to the International Monetary Fund (IMF) in a report entitled World Economic Outlook of October 2010:

Monetary policy should remain accommodative because of muted inflation, subpar growth, and lingering financial strain. The Fed has maintained the policy rate at a record low while signaling that conditions are likely to warrant keeping the rate at exceptionally low levels for an extended period. In light of larger downside risks, the Fed’s recent decision to resume its purchases of government securities (using resources from maturing government-sponsored-enterprise debt and mortgage-backed securities in its portfolio) is appropriate. In the event that such risks materialize,  policy responses could include a strengthened commitment to maintaining the ultra-low policy rate for an extended period, expanding asset purchases, and relaunching facilities to aid stressed markets. Meanwhile, the Fed has been developing a well-diversified toolkit for managing monetary conditions, which will help facilitate monetary exit when needed.

Although the uncertainty is somewhat frightening for most Americans, there are plenty of arguments against fiscal austerity before the U.S. is clearly on a  sign of recovering from the recession, the main being that it could derail any hope for recovery by contracting GDP and raising unemployment.  And coupled with what many economists argue along with the IMF position in support of quantitative easing, it is apparent with the stagnant economy and high level unemployment that stimulus is badly needed.  For the fiscal austerity movement, once the economy improves sometime in 2011, we can immediately begin austerity measures to bring the national debt under control, but only upon clear signal that the U.S. economy is recovered.

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Quantitative Easing By Feds: Help or Harm?

With the national debt of the United States currently at 13.4 trillion dollars coupled with lackluster economy that could face deflationary pressures, some economists agree that further stimulus through quantitative easing or QE2 could spur the inflation target necessary to create jobs, strengthen the economy and lower the national debt simultaneously.  And while these economists insist that any austerity measures implemented in the U.S. to reduce the deficit while still attempting a recovery from the worst recession since the Great Depression could cause an abrupt halt in the economic recovery while plummeting into a double dip,  other economists with the same fervor insist that quantitative easing is tantamount to raising the deficit beyond a threshold to where economic growth could no longer occur as the cost of servicing the deficit could begin to compound itself to the principal.

The U.S. believes that it can learn from Japan’s mistakes.  If that is true, and quantitative easing should be successful preventing the U.S. from a lost decade similar to Japan, then the U.K.’s deep cuts in government spending and harsh austerity measures, the opposite of the U.S. approach, should negatively affect their economic growth, and yet the U.K. reports that their economy has grown faster than expected and all indicators support the new government’s economic policies.

Although there are big differences to both economies of the U.S. and the U.K., it could very well be that what works for one, may not work for the other.  On the other hand….

May He save our souls!