Following the release of August’s dismal jobs report, the Federal Reserve said that it would consider further efforts to jump-start the nation’s economic recovery. Thursday, its plans for that economic stimulus effort were made public.
Fed open-ended economic stimulus
Following a two-day meeting of its policy committee, the Fed announced that it will start a third round of “quantitative easing” by spending $40 billion every month on mortgage-backed securities in order to drive down the borrowing costs of consumers. That effort will continue as long as the Fed deems it necessary.
In addition, the Federal bank announced it will keep short-term interest rates at historic lows six months longer than it has previously announced, until the end of 2015.
While it also lowered its growth outlook for 2012 from 2.4 percent to two percent, the Fed expects stronger growth in 2013 and 2014. It expects the unemployment rate, currently at 8.1 percent, to drop to 6.7 percent in 2014.
Stock market rallies following announcement
Following the announcement, the Dow Jones industrial average climbed more than 200 points by mid-afternoon, to its highest level since December of 2007. Nearly four times as many stocks were on the rise as were falling.
Fed chairman Bernanke, during a news conference, said that raising stock prices was part of its goal in its stimulus efforts.
Some may say the timing of the move is calculated to raise the public’s confidence in the economic recovery, and the policies of the Obama Administration, just weeks before the election in November. To those critics, Bernanke said:
“We make our decisions based entirely on the state of the economy.”
But will it be enough?
Some analysts, however, criticized the efforts as insufficient. Paul Ashworth, an economist at Capital Economics, said:
“We doubt it will be enough to get the economy on the right track. It’s only a matter of time before speculation begins as to when the Fed will raise its purchases from $40 billion a month.”
Some economists believe that it will take about three years for the unemployment rate to drop below seven percent. If the Fed spends $40 billion a month on mortgage bonds for three years, it will amount to $1.4 trillion, which is still less that the $1.7 trillion spent in the Fed’s first round of bond buying. That lasted from November 2008 to March 2010.
An additional $600 billion was spend on bonds from November 2010 through June 2011.
Some critics also argue that further bond buying has the potential of raising inflation.