Unemployment remains stubbornly high in the US at 9.6% Fed pumps $600bn into US economy
Unemployment remains stubbornly high in the US at 9.6% The Federal Reserve will announce later its plans to stimulate the US economy, with expectations high that they will feature the reintroduction of so-called quantitative easing (QE).
Many analysts expect the Fed to start pumping around $500bn (£310bn) into the economy to boost the fragile recovery.
The economy grew by an annual rate of 2% between July and September – not enough to reduce high unemployment.
Some analysts see QE as the last chance to get the US economy back on track.
Interest rates are already close to zero, which means the Fed cannot reduce rates any further in order to boost demand – the more traditional policy used by central banks to stimulate growth.
Instead, it is likely to announce a fresh round of QE, in which it would pump hundreds of billions of dollars into the economy by creating money to buy government bonds.
The programme has been dubbed QE2, after the Fed pumped $1.75tn into the economy during the downturn in its first round of QE.
“We expect an intention to purchase $500bn of longer-dated Treasury securities over the next six months”
Michael Feroli JP Morgan Chase
Most analysts expect QE2 to total around $500bn, with the possibility of further injections in the future.
“We expect the statement will announce an intention to purchase $500bn of longer-dated Treasury securities over the next six months,” said Michael Feroli at JP Morgan Chase.
“In addition, we expect the statement will express a willingness – but not necessarily a bias – to further increase asset purchases if warranted by economic conditions.”
Michael Hanson at Bank of America Securities-Merill Lynch said: “This up-front commitment is necessary to extend the rally in financial conditions.”
However, opinions are divided about how effective QE2 will be, partly because of questions about how much impact the first, much larger, round of QE had.
Some credit the programme with pulling the US out of recession, while others argue that it had little impact on consumer demand and the tight credit conditions that make it hard for individuals and businesses to access bank finance.
The theory behind QE
Central banks create money to buy government, and sometimes corporate, bonds, for three main reasons:
To reduce the cost of borrowing – buying government bonds increases their price and lowers their yield, or the interest they pay out, which in turn puts downward pressure on interest rates across the economyTo inflate asset prices – with bonds paying out lower interest rates, investors look to buy other asset classes, such as equities, pushing prices upTo increase lending – by paying money to banks to buy bonds, the banks then have more money to lend to businesses and individualsThe Wall Of Money: A guide to QE2
As a result, some economists believe the Fed will have to pump far more than $500bn into the economy to make a meaningful difference.
What most do agree on, however, is that the Fed must do something.
The US economy grew at an annualised rate of 2% between July and September.
The annualised rate is the rate at which the economy would grow over a year if the three-month growth rate were replicated over all four quarters.
While this was an improvement on the 1.7% annualised growth seen between April and June, it was less than the 3.7% annualised growth recorded in the first three months of the year.
Together, these growth rates are below the historical rates posted by the US economy during recoveries from recession.
Also a cause for concern is the fact that growth in business inventories made up more than two-thirds of the annualised 2% third-quarter growth – in other words, businesses simply re-stocking following the downturn.
Such modest rates of growth are having little impact on the high level of unemployment in the US, which currently stands at 9.6%.
Official figures show that the economy lost a 95,000 jobs in September, as public-sector cuts outpaced hiring by the private sector.
This was almost double the figure for August, when 54,000 jobs were lost.
It is this high level of unemployment that is acting as a key drag on economic growth.
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