Fed Poised to Aid Economy! What else is new

Discussion in 'Economics' started by S2007S, Nov 2, 2010.

  1. S2007S


    Notice the headline, Fed Poised to Aid Economy!!!

    I just find it amusing that day after day since this crisis touched down years ago that all this economy has left in it is the fed giving it trillions of dollars to keep it moving along, and with the fed its usually huge asset bubbles creating so called "growth" in our economy. Its become a fucking joke that the only way the wheels spin in this economy is through fed intervention and the trillions they throw out to the economy. They are going about the wrong way to fix this crisis, it will be shown in the years to come that spending your way out of a crisis is not the way to economic growth but economic disaster.

    Fed Poised to Aid Economy, But Impact is Cloudy
    The New York Times | November 02, 2010 | 08:32 AM EDT

    The Federal Reserve is all but certain to move to spur the nation’s sputtering recovery this Wednesday, but most economists say it is unlikely to have a big impact on employment and growth.

    Overruling objections from a handful of inflation-fearing dissidents, the Fed’s policy-setting committee, which begins a two-day meeting on Tuesday, is expected to resume quantitative easing, a strategy of buying Treasury securities to put downward pressure on long-term interest rates. The hope is that new action by the Fed will make a deflationary spiral of falling prices less likely, and make it somewhat easier for consumers and businesses to borrow and spend.

    In theory, the Fed could print trillions of dollars to achieve its aim, but it is far more likely to start with a smaller amount — perhaps a few hundred billion — and gradually buy more bonds as conditions warrant.

    That open-ended, conditional approach would be a departure from the Fed’s first, $1.7 trillion round of debt purchases, which lasted about 15 months and ended in March.

    The Fed’s chairman, Ben S. Bernanke, seems to be under no illusion about the potency of the new purchases, having declared in August that “central bankers alone cannot solve the world’s economic problems.”

    With inflation well below the Fed’s unofficial target of 2 percent, unemployment stuck at nearly 10 percent, and gross domestic product growing at a lethargic rate, Mr. Bernanke has evidently concluded that doing nothing is not an option.

    Mr. Bernanke has long argued that a central bank, having lowered short-term rates to zero, as the Fed did in December 2008, still has tools to prevent an economy from slipping into deflation; he is now following that advice.

    But economists seem to be in broad agreement that no matter the magnitude of the Fed’s actions this week, the economy will remain challenged for some time.

    “There is a substantial chance that the U.S. economy is headed into a lost decade, similar to what Japan has experienced in the past 15 years, possibly with zero inflation instead of actual deflation,” said Robert J. Gordon, of Northwestern University, who serves on the committee that determines the start and end dates of recessions.

    “But the consequences for the U.S. population will be much more severe than in Japan,” he added, “because of our higher unemployment rate, our lack of a social safety net, our system that ties medical insurance to employment instead of making it a right of citizenship, our greater inequality and our higher level of poverty.”

    Guillermo A. Calvo, of the School of International and Public Affairs at Columbia University, gave a similar assessment.

    “The central problem in the U.S. is the breakdown of the credit channel, especially credit for small firms and for working capital,” he said. “Buying long-term Treasury bonds amounts to directing credit toward a sector that has no need for it.”

    The Fed’s actions, Mr. Calvo said, will mostly be felt abroad. Quantitative easing is likely to push down the value of the dollar and send even more money flowing into the faster-growing economies of Asia and Latin America, where interest rates are higher and inflation is a greater worry than in the sluggish economies of North America and Western Europe.

    Mr. Calvo said the result could be heightened tensions over currency and trade and pressure on emerging-market countries to curb the flow of capital into their economies.

    The Fed has clearly taken steps to address both sources of anxiety, domestic and foreign, and to fully prepare the markets for its next move.

    On Aug. 10, the Fed took a baby step toward additional monetary expansion, deciding to use proceeds from its portfolio of mortgage-backed securities to buy two- to 10-year Treasury securities. In an Aug. 27 speech in Jackson Hole, Wyo., Mr. Bernanke emphasized the need to analyze both the costs and the benefits of action, but made it clear he was prepared to move if needed.

    At the Fed’s most recent policy meeting, on Sept. 21, the committee said it was “prepared to provide additional accommodation if needed,” and in a speech in Boston on Oct. 15, Mr. Bernanke said “there would appear — all else being equal — to be a case for further action.”

    The actions have already had an effect. Since Aug. 10, long-term interest rates have fallen, stock prices have risen and expectations of inflation have crept upward.

    At a closed-door gathering of central bankers from the Group of 20 economic powers in Gyeongju, South Korea, on Oct. 22 and 23, Mr. Bernanke tried to reassure his peers, some of whom expressed alarm about the effect of Fed action on the dollar.

    In response, Mr. Bernanke cited the imperative of supporting domestic growth and the role American consumer demand plays in sustaining the worldwide recovery, according to people who attended the meeting.

    What the chairman has not managed — or necessarily tried — to do, however, is to quell the dissenting voices within the Fed who say additional action is a grave mistake.

    The most prominent dissenter, Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City, has argued that new quantitative easing could lead to imbalances and volatility, undermine the Fed’s independence and unmoor inflation expectations. In his most pointed language to date, he recently called the plan a “dangerous gamble” and a “bargain with the devil.”

    Other regional Fed presidents — Charles I. Plosser of Philadelphia, Richard W. Fisher of Dallas and Jeffrey M. Lacker of Richmond — also oppose additional bond purchases. But there is substantial support for more monetary stimulus from William C. Dudley of New York, Eric S. Rosengren of Boston, Charles L. Evans of Chicago and, recently, Dennis P. Lockhart of Atlanta.

    Speculation about “hawks” (whose priority is fighting inflation) and “doves” (who put relatively greater emphasis on reducing unemployment) is a well-established game among Fed watchers.

    But it is Mr. Bernanke’s opinion that ultimately matters. He has studiously avoided wading into fiscal controversies, but it seems clear that the gridlock over taxes and spending, and the virulence of the rhetoric going into the Tuesday elections, has deprived the central bank of the support fiscal policy can play in bolstering the recovery.

    “Fiscal measures would accomplish something; they directly support spending and therefore G.D.P.,” said James K. Galbraith, an economist at the Lyndon B. Johnson School of Public Affairs at the University of Texas, Austin. “Quantitative easing will accomplish nothing beyond flooding the banks with cash which they will use, if at all, for speculating rather than lending.”

    But Scott E. Pardee, an economist at Middlebury College, said Mr. Bernanke was correct to do all he could. “As long as unemployment is so high, and the housing market is not standing on its own two feet yet, the Fed has no other choice,” he said.
  2. Correctamundo!

    What the Fed ACTUALLY does is PROMOTE INFLATION. GDP is measured in "cost of goods/services".... it has a significant inflation component... which the government/Fed downplays.

    Most of our "growth in GDP" over the last 20 years is really just inflation. The Fed is more of America's enemy than anything else, regardless of how it's promoted.

    If GDP were calculated by "number of units of output, adjusted for labor cost"... China might already have surpassed the USA as the world's leading economic power.
  3. Will the markets rise and the Dollar tank tomorrow?

    It seems a bit too easy of a trade, no?
  4. This country turns into a third world, banana republic, by the hour. This completely backwards assed concept that inflation at all costs will somehow save the system is beyond ludicrous. YET, I hear it voiced and supported by a large enough group of posters on here that I fear it is quite a widespread notion.

    Face it, if an all out concerted effort to do anything and everything to debase the currency, jack up asset prices is the only thing to "save" the system, the system is not at all worth saving. End of story.
  5. Come on, man. Just have a look at real GDP as opposed to nominal GDP...inflation is factored out.

    Just because the mainstream media reports something in their headlines, doesn't mean you shouldn't dig deeper...
  6. olias


    I'm not saying I totally disagree, but I am curious if you all (not you Kass) have you all studied the Great Depression? Specifically, what mistakes were made that made the depression worse, and how the US recovered?
  7. QE news must be baked into the cake by now. the most likely scenario is for the market to sell off on the news.

    the only thing that is preventing the selling now is the possibility of a much larger than expected size of QE2. sh't like that can happen. Fed could be desperate at this point. but i have read somewhere and it seems reasonable that a huge QE2 could be interpreted by the market as a sign of desperation resulting in a major dump.

    i guess Fed has to do just enough not to spook the market.
  8. olias



    • It can be argued that the shock hitting the US economy in this recession was bigger than the one that led to the Depression. The asset price bubble bursting this time was in the housing market, which tends to have larger economic impact than a bursting equity market bubble. The growth in credit running up to the crisis is likely to have been spread across more sectors as well and the development of complex financial products has added to the difficulties in solving the crisis.

    • A key difference this time, however, is the policy response. While both monetary and fiscal policy was actually tightened during the Depression, adding to the downward spiral, policy has been eased substantially during this crisis. Efforts to ease the meltdown in credit intermediation were also absent during the Depression. Today, authorities have focused strongly on fighting the financial crisis and continue to make efforts to provide liquidity and capital to the banking system to get credit flowing again.
  9. S2007S


    The dollar is on the verge of collapsing and when it does collapse lets hope no one is surprised because its a given fact its going to in the next 12-18 months.

    This needed to be posted once again!!!!!!!

    Geithner vows U.S. will not devalue dollar


    Treasury Secretary Timothy Geithner talks during an event at the Commonwealth Club in Palo Alto, California, October 18, 2010.

    By Jim Christie and David Lawder

    PALO ALTO, Calif./WASHINGTON | Tue Oct 19, 2010 4:27am EDT

    PALO ALTO, Calif./WASHINGTON (Reuters) - Treasury Secretary Timothy Geithner vowed on Monday that the United States would not devalue the dollar for export advantage, saying no country could weaken its currency to gain economic health.

    "It is not going to happen in this country." Geithner told Silicon Valley business leaders of devaluing the dollar.

    Geithner broke his silence on the dollar's protracted slide ahead of this weekend's meeting of finance leaders from the Group of 20 wealthy and emerging nations in South Korea, where rising tensions over Chinese and U.S. currency valuations are expected to take center stage.

    "It is very important for people to understand that the United States of America and no country around the world can devalue its way to prosperity, to (be) competitive," Geithner added. "It is not a viable, feasible strategy and we will not engage in it."

    Answering audience questions before the Commonwealth Club of California in Palo Alto, he said the United States needed to "work hard to preserve confidence in the strong dollar."

    Geithner, normally reluctant to publicly discuss currency and market movements, has not uttered the so-called "strong dollar mantra" -- a refrain he helped create at Treasury in the 1990s -- since February.

    On Friday, the dollar index hit a 10-month low against a basket of major currencies, while the greenback has been plumbing fresh 15-year lows against Japan's yen .

    Many emerging market countries are complaining that Fed money creation is weakening the dollar, and causing more funds to flow into their markets, pushing up their currencies.

    Talk of a "currency war" has persisted as countries take action to keep from losing export competitiveness.

    Brazil on Monday moved to cool a strong rally in its currency by raising taxes for foreigners buying local bonds and trading in foreign exchange derivatives.

    Finance Minister Guido Mantega said the move was aimed at reducing foreign investment into Brazil, and he urged other countries to take coordinated action against the weak dollar.

    Argentina's Minister of Economy and Public Finance Amado Boudou on Monday called on developed nations to focus on creating jobs rather than actions that weaken their currencies, saying a "true currency war" was underway.


    The G20 finance ministers and central bank governors at the meetings in Gyeongju, South Korea are expected to tackle head-on the disparities in currency policies that are distorting capital flows in the hopes of achieving a more coordinated approach.

    But U.S. officials have put most of the blame on China's highly restrictive exchange rate regime, which until recently had kept the yuan largely pegged to the dollar. The United States is pressuring China to allow the value of its yuan to rise to take some pressure off capital flows and to rebalance its economy away from exports.

    On Friday, however, Geithner delayed a report about whether the yuan's value is being manipulated, saying instead that he wants to work through the G20 process to hash out a multilateral solution.

    Geithner said in Palo Alto that he believes China will continue to lift the value of its yuan currency to aid the rebalancing of its economy away from exports and toward domestic growth.

    Asked how much higher China should allow the yuan to rise, Geithner said: "Higher."

    "You can't know how far it should go. What you know now is that it's significantly undervalued which I think they acknowledge and it's better for them, and of course very important for us, that it move. And I think it's going to continue to move," Geithner said.

    However, his remarks did not square with an official Chinese state newspaper that reported the accelerated pace of yuan appreciation in recent weeks will not last long because China's trade surplus will soon peak.

    Beijing has allowed its currency to rise about 2.8 percent since ending a 23-month peg to the dollar in June, with most of that rise coming since August.

    Geithner said the delay in the report was an acknowledgment of the faster pace of yuan appreciation and we'd like to see that sustained."

    At the G20 meetings in Gyeongju and a November leaders summit in Seoul, Geithner said he wanted to "maximize the chance that we can mobilize broader international support behind a set of improvements to the exchange rate policies of China and other emerging economies.

    Asked if the dollar would lose its status as the world's reserve currency, the Treasury chief said, "not in our lifetime."

    To do this, Geithner said the United States must maintain growth, but also demonstrate that it can restore budget discipline and improve its long-run fiscal prospects.
  10. S2007S


    The fed will not let the market down tomorrow afternoon, they will most likely come in with $500 Billion and keep the doors open for more QE2 which will keep any rally going forward intact.
    #10     Nov 2, 2010