Fed To Keep Rates Close To Zero And To Buy Government Bonds

Ben Bernanke, The Current Chairman of the Fed

U.S. National Bank, the Federal Reserve (Fed) announced it will buy government bonds worth 600 billion dollars over the next eight months, to lower interest rates and encourage economic growth, a measure accompanied however by a series of risks.

Many voices outside the Fed, but also some in the organization, considered a desperate attempt by the bank president, Ben Bernanke. He adopted unconventional policies during the financial crisis to avoid financial system collapse. But a year and a half later, faced with an economy still affected by high unemployment, a blocked political system and the threat of a period of deflation. The Fed left open the possibility of taking further measures, if not economic growth and inflation will rebound in coming months.

The Dow Jones Industrial Average continued its ascent began Wednesday in August, when Bernanke suggested that it is possible to launch bond purchase program. These reactions are interpreted by the Fed as market incentives for the economy.

Besides the impact of declining interest rates, stock market growth could encourage people to spend more and more companies to invest. In addition, a depreciation of the dollar would make U.S. exports cheaper and easier to sell abroad. “All these things are part of what the Fed is trying to do and I think that it would be a success,” said Laurence Kantor, an analyst at Barclays Capital in New York. The measures announced Wednesday were largely matched economists’ expectations, although some believed that the total expenditure will be slightly smaller and will take place more quickly.

But there are huge and unknown risks. Basically, now the Fed will print money to buy up government bonds in June amounting to 900 billion dollars – an amount roughly equal to that which the Government intends to borrow for the same period. In a normal period, the approach of the Federal Reserve would lead to a significant increase in inflation due to the influx of money into the economy and fears of excessive government spending. The mere risk of an excessive inflation in the financial markets could lead to increased long-term interest rate, which would make the Fed’s program to fail.

Under these conditions, one of the leading Republicans in the House of Representatives, Michael Pence, said the Fed assumes “incalculable risk”. In a statement released after the Fed meeting, the bank explained that act to “promote a faster pace of economic recovery” and to ensure that inflation, which is currently about 1% per year, increasing by unofficial target Federal Reserve, 2%. This is the second major experiment of the Fed buying bonds.

During January 2009 – March 2010, the bank purchased bonds issued or guaranteed by state mortgage lending financial institutions amounting to 1,700 billion dollars. And that measure has generated fears of inflation, have not materialized, however. Critics also warned that a weaker dollar is in U.S. could lead to higher interest rates. But Fed officials now believe that the depreciation of the dollar to sustain growth.

Some voices underline that by purchasing government bonds; the Fed reduced pressure and hit the White House and Congress to find solutions for long-term deficit reduction. Bernanke assured that tries to avoid such political calculations. Monetary relaxation initiated by FED is one method to boost the economy by artificially lowering interest long term loans, given that short-term interest rates are already close to 0.

But many economists are questioning the FED motion effects, given that many households are focused on decreasing the amount of savings to offset their own homes – and the FED measure is meant to spur consumption. Another effect could also be the depreciation of the dollar against the currencies of U.S. trading partners.

“The announcement is more cautious than initially expected,” said economists at Goldman Sachs, indicating the potential for development of the program is only implicitly. “We believe that the FED will eventually do more than that, given the disappointment expressed by them in the declaration.”

The World Bank puts pressure on China

In another corner of the world, China’s trade surplus (the difference between what we export and import terms) began to grow again, and the Government has made only “limited progress” in rebalancing its economy toward domestic consumption, says the World Bank.

The Bank has updated forecasts about economic growth this year to 10 percent, but said interest rates should continue to rise to curb inflationary trends, informs Financial Times.

However, despite international debate on China’s monetary policies that could occur during the G20 summit in South Korea, World Bank warned that the Chinese economy will have to make a significant jump in its agenda of structural reforms if it intends to reduce the external surplus.

“Rebalancing will not happen by itself – will require significant policy adjustments,” the report said. The new bank’s forecasts on China’s trade surplus could put additional pressure pa G20 Chinese negotiations, given that Chinese representatives have cited the trade surplus declines earlier this year to support the fact that the economy is already in rebalancing .

China’s trade surplus fell sharply in 2009 as installed in world financial crisis, while China’s huge incentive program boosts imports. The process continued during the first months of this year, including a trade deficit in March. However, in recent months, the surplus continued to grow strongly, by 26.5 billion U.S. dollars more than in Q3, compared with the corresponding period last year.

The Fed keeps interest rates close to zero

U.S. Federal Reserve (Fed) has maintained Wednesday monetary policy rate close to zero and announced a massive program of 600 billion dollars for the purchase of bonds issued by U.S. state, according to Reuters
The acquisition of government bonds, which will run until the middle of next year, aims to accelerate U.S. economic growth. The measure implemented by the Fed will reduce borrowing costs for individuals and companies, after the worst recession since the Great Depression of the ’30s.

Thus, the central bank buys U.S. Treasury securities during the month long worth 75 billion dollars. The program will be reviewed regularly and will be adjusted depending on the evolution of the economy.

The management institution called the U.S. economic recovery as “slow”, the statement issued at the end of the monetary policy meeting, adding that employers remain reluctant to increase the number of employees. The Fed repeated its commitment to maintain the key interest, located in the band of variation of 0 to 0.25%, record low for a prolonged period.

Including Fed plans to reinvest the funds generated by the bonds maturing in the next period; the institution anticipates that it will buy Treasury securities worth U.S. $ 850-900 billion by the end of the second quarter of next year. The Fed has not changed interest rates since December 2008 to help the economy out of its worst recession since the crisis in the ’30s. Also, the Fed has conducted a program worth 1.700 billion dollars for the purchase of government bonds or guaranteed mortgages.11