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Fed pumps $600bn into US economy

Unemployment Americans attend a job fair in California

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.

This article is from the BBC News website. © British Broadcasting Corporation, The BBC is not responsible for the content of external internet sites.

Rescue tug damaged grounded sub

A Royal Navy nuclear submarine which ran aground off the Isle of Skye last month was damaged by a tug during its rescue, it emerges.

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Got any Nine Inch Nails?

Playing music in the operating theatre helps surgeons relax

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Arts body starts funding shake-up

The way the arts are financed in England is about to be transformed with the introduction of an applications system from the main public funding body.

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Hammer time!

The classic horror brand is back, with new vampire film Let Me In

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Real draw at Milan to go through

Substitute Pedro Leon’s injury-time goal rescues a draw for Real Madrid at AC Milan as they qualify for the last 16 of the Champions League.

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Neo-Nazi radio arrests in Germany

German police arrest 23 people suspected of being involved in an illegal far-right internet radio station broadcasting neo-Nazi views.

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Tea leaves

The Tea Party is loosely-organised, leaderless and libertarian

The low taxes-small government campaign movement known as the Tea Party has helped the Republicans to big gains in the US mid-term elections. But what will this potent, libertarian strand of politics do with its newly-won power?

The Tea Party is celebrating after a number of solid victories for its favoured candidates.

Rand Paul helped the Republicans to convincingly hold their Senate seat in Kentucky. Nikki Haley won the South Carolina governorship. Marco Rubio triumphed in a three-way fight to become senator for Florida.

“If you run on hating the government and become the government, it is hard to not be hated”

Jill Lepore Historian

There were other less heralded winners, but also defeats for Sharron Angle in Nevada, Christine O’Donnell in the Delaware Senate race and Carl Paladino in the New York gubernatorial battle.

But the question the analysts are wrestling with is where the movement will go next?

The looming theme in US politics is the possibility of deadlock, with the Senate still in Democratic hands and the House of Representatives in Republican hands, and with a Democrat in the White House.

For the newly-arrived Tea Party-backed legislators, there may be difficult waters to navigate if they actually want to pass laws. There’ll reportedly be a meeting of all of them organised by the Tea Party Patriots grouping in the next couple of weeks, and Mr Paul plans something similar.

“You need to gain enough clout in the legislature to pass identifiable policies that you can claim credit for,” says Prof Wendy Schiller, from Brown University.

“But if they pass amorphous Bush tax cuts and cut spending that is not anything the Tea Party can go home and boast about.”

One major question for the short and medium term is whether the movement should try and retain its character as a loosely-organised, organic, unhierarchical movement, or coalesce into a coherent political grouping with a leader.

Sarah Palin has often been identified as a sort of spiritual leader for the movement, but the movement might want something more concrete.

There were notable successes on election night

“You need a charismatic Tea Party leader,” says Prof Schiller. “The conflict is do they stick with Sarah Palin as their charismatic leader when she is not in the Senate or House.

“You can stick with an outsider persona or you can find some one in the chamber like Rand Paul who can be your voice in government. The key is making the transition.”

Mr Paul was already a prominent figure in the Tea Party, before last night’s victory.

He has said he could form a Tea Party caucus in the Senate and previously identified Jim DeMint and Tom Coburn as people he would be happy to work with.

“You need someone who is articulate, good-looking and can raise money,” says Prof Schiller. “The Senate is an amazing forum for individuals to make their own reputations.”

But for a movement that has been so insurrectionist, with the slogan “take back Washington”, there is a difficulty if they are drawn into the negotiation, compromise and trade-offs that characterise law-making in the capital.

It was not a night of unbridled success for the Tea Party

“If you run on hating the government and become the government, it is hard to not be hated,” says Jill Lepore, American historian, New Yorker writer and author of The Whites of Their Eyes: The Tea Party’s Revolution and the Battle over American History.

“There is going to be disappointment among the supporters. They won’t be able to do what they promised to do.”

To take one policy, the extension of the Bush-era tax cuts, which will lapse on 1 January, deadlock could still continue. President Obama wants to extend them for income up to $200,000, while the Republicans want them extended for everybody.

“They [Tea Party supporters] are going to be looking for pretty quick answers,” says Kate Zernike, author of Boiling Mad: Inside Tea Party America. “They want a balanced budgets but they want taxes to be cut.

“This is a movement that has expressed scepticism for some of the messier compromises, but that’s how laws are made.”

Writing in the Wall Street Journal, Senator DeMint urged Tea Party-supported candidates to stick to the principles that had got them to Washington.

“Put on your boxing gloves. The fight begins today,” he wrote.

What the Tea Party will be able to deliver is inaction, Prof Lepore says. They can loudly shoot down every measure that their supporters would want shot down. But that might not always endear them to the Republican establishment.

“Members of the Tea Party really see themselves as Conservatives rather than partisans,” says Prof Jay Barth, of Hendrix College. “They won’t be thinking about what is best for the party. That is going to be a real challenge.”

Mark Meckler and Jennybeth Martin, co-founders of the Tea Party Patriots

The movement has made a rapid rise to national attention

There might even be a shift in the rhetoric of the Tea Party – perhaps a little bit less 1773 (the year of the famous Boston Tea Party) and a little more 1787 (the year the constitution was drawn up).

“When the movement began it was all about insurrection and revolution,” says Prof Lepore. “In the last phase it’s been more about constitutionalism.”

Exactly how the movement fits into the wider Republican Party in office is likely to prove a big political story for the next two years.

“There will be a conflict within the Republican Party,” says Prof Schiller.

This article is from the BBC News website. © British Broadcasting Corporation, The BBC is not responsible for the content of external internet sites.