Federal Reserve to Inject Up to $1tn to Spur US Economy

Strategic Insights -

The US economy, struggling with high unemployment and stagnant growth, is set to receive a significant boost as the Federal Reserve is expected to inject up to $1tn in quantitative easing to stimulate growth and create jobs. Fed chairman Ben Bernanke is expected to override doubters and implement the stimulus, which would be in addition to the $1.7tn already spent, in a bid to improve the national income growth and job prospects. The decision will likely set the tone for other central banks, including the Bank of England, European Central Bank, and Bank of Japan, which are also meeting this week to discuss ways to boost their economies.

Key Takeaways:

  • The Federal Reserve is expected to inject up to $1tn in quantitative easing to stimulate the US economy, in addition to the $1.7tn already spent.
  • The decision is expected to set the tone for other central banks, including the Bank of England, European Central Bank, and Bank of Japan, which are also meeting this week.
  • The move is aimed at improving national income growth and creating jobs, with unemployment stuck at 9.6% for the past two months.
  • The Fed's mandate marries maximising employment and maintaining stable prices, but it is currently failing on both counts.
  • Nouriel Roubini, an economist, has warned that the Fed's easing may lead to a Japanese-style stagnation, where growth is barely positive and deflationary pressures linger.
  • The US economy has grown in each of the past four quarters, but housing investment remains a weak element, and exports have worsened.

Statistics:

  • Up to $1tn in quantitative easing is expected to be injected by the Federal Reserve.
  • $1.7tn has already been spent in quantitative easing.
  • The US economy has grown in each of the past four quarters, driven by business investment and spending by consumers.
  • 9.6% is the current unemployment rate in the US.
  • The gross domestic product in the second quarter came to just 93.5% of potential GDP, leaving a large section of the economy idle.

Sources:

  • The Guardian
  • Corbis (photograph of Ben Bernanke)
  • Bloomberg
  • Reuters
  • Centre for Economics and Business Research
  • Evolution Securities