Fed’s Talk May Soon Turn to Action

Aug. 31, 2011 - PRLog -- The recently published minutes from the Federal Open Market Committee’s (FOMC) August 9 meeting revealed that its members discussed ways to promote economic recovery and employment, while possibly laying a foundation for action in their next meeting scheduled for the end of September. The August 9 meeting minutes, published yesterday in Washington, also revealed that several FOMC members spoke out in favor of “more significant action” to be taken, in addition to vowing to hold interest rates at a record low level for the next two years. DT Trading analysts observed that the stock market grew a little on purchases as a result of the published minutes revealing the Fed’s growing support for taking further steps to stimulate the recovery, which is also being mired by unemployment.  The Fed may make a decision in its next meeting scheduled for September 20-21 to exchange short-term treasury obligations in the Fed’s balance for $1.65 trillion in long-term obligations in an attempt to reduce the interest rate on various types of loans, such as mortgages and car loans.  “The discussion of the various options kind of left you with a sense of not whether they are going to do more, but what are they going to do,” said Michael Feroli, chief U.S. economist at JPMorgan Chase in New York and a former Fed economist.

Yesterday, the Standard & Poor’s 500 Index rose 0.2% to 1,212.92 as of 4:00PM in New York after a 1.2% drop. Yields on 10-year treasury bonds fell from 2.26% to 2.18%. FOMC members discussed a number of instruments, including subsequent buy-ups of government bonds and increasing the amount of long-term maturity bonds in the Fed’s portfolio. However, the committee members still did not reach a consensus on what they could do if these measures nevertheless lead to a further weakening of the economy. They will discuss options in more detail when they gather next month for a two-day meeting, which had initially been planned for one day. “The consensus view is that while the Fed doesn’t have all the answers, it could still have a net positive effect” on the economy, said Dana Saporta, an American economist at Credit Suisse in New York. “And, I believe that will be the determination at the September meeting.”

According to economists at DT Trading, the Fed has the ability to lower the interest rate even below 0.25%, which it pays banks on the $1.6trillion of excess reserves it keeps in the central bank to encourage them in turn to use the funds to offer loans to consumers and companies. The Fed could also pledge to keep a record $2.86 trillion on its balance for “a long-term period” or for a set amount of time. However, some members of the Fed “judged that none of the tools available” at the central bank’s disposal “would likely do much to promote a faster economic recovery,” the minutes revealed. The officials were concerned that offering additional stimulus would risk raising inflation without providing “significant benefit” in terms of speeding up the recovery or bringing down the unemployment rate.

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