Federal Reserve to Resume Quantitative Easing Amid Widespread Economic Concerns

Strategic Insights -

The Federal Reserve is widely expected to resume quantitative easing on Wednesday, a move aimed at stabilizing the nation's sputtering recovery and avoiding a deflationary spiral. Despite objections from inflation-fearing dissident members, the Fed's policy-setting committee is likely to implement a smaller, open-ended program of buying Treasury securities, which will put downward pressure on long-term interest rates and make borrowing and spending somewhat easier for consumers and businesses. The move comes as unemployment remains stubbornly high at nearly 10%, and the economy is growing at a lethargic rate, with inflation well below the Fed's unofficial target of 2%. Economists are cautioning that the Fed's actions, while welcome, will not have a significant impact on employment and growth, and that the economy may be headed into a "lost decade" similar to Japan's experience in the past 15 years.

Key Takeaways:

  • The Federal Reserve is expected to resume quantitative easing on Wednesday to stabilize the nation's sputtering recovery and prevent a deflationary spiral.
  • The new program will involve buying Treasury securities to put downward pressure on long-term interest rates, making borrowing and spending easier for consumers and businesses.
  • Although economists agree that the move is necessary, they also caution that it will not have a significant impact on employment and growth.
  • The economy may be headed into a "lost decade" similar to Japan's experience, with severe consequences for the US population, including higher unemployment, poverty, and inequality.
  • Guillermo A. Calvo of Columbia University said that the Fed's actions will mostly be felt abroad, pushing down the value of the dollar and sending more money flowing into faster-growing economies in Asia and Latin America.
  • 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.
  • Despite opposition from some regional Fed presidents, there is substantial support for more monetary stimulus from others, including William C. Dudley of New York and Eric S. Rosengren of Boston.

Statistics:

  • Unemployment rate: 9.9% (as of October 2010)
  • Inflation rate: below 2% (Fed's unofficial target)
  • Long-term interest rates: falling since August 10 (34-day decline)
  • Stock prices: up since August 10 (10.8% increase)
  • GDP growth: 1.7% (Q3 2010 estimate)
  • Fed's balance sheet: significantly larger than pre-crisis levels (Swollen Balance Sheet, B5)

Sources:

  • New York Times, October 25, 2010
  • Bloomberg, October 25, 2010
  • Reuters, October 25, 2010
  • Federal Reserve Bank of Cleveland, October 2010 (Chart: The Swollen Balance Sheet)