NVDAILY.COM | Opinion
Posted November 5, 2010 | Leave a comment
The Fed steps in
While politicians surveyed the stark aftermath of Tuesday's elections and pondered their strategy and policy options, the Federal Reserve Board announced a bold plan to stimulate the sluggish economy.
The Fed said that it would buy $600 billion in Treasury bonds over the next eight months in an effort to push down long-term interest rates and encourage businesses to expand and create jobs.
Ben Bernanke, the Fed chairman, had telegraphed the move in August but delayed action until after the election to deflect charges of trying to influence the outcome.
The Fed usually exerts influence on the economy by adjusting interest rates to spur or dampen demand, but with rates already near zero that option is nonexistent.
So Bernanke and Co. are using the Fed's power to borrow -- in effect, printing money -- to inject cash into the economy. While that raises government debt, which raises Republican hackles, the Fed also has the flexibility to pay it back when it chooses by selling the bonds it purchases.
The size of the gambit surprised market analysts, who expected a $300 billion to $500 billion range, but the Fed said its purchases would come in $75 billion monthly increments, which gives it flexibility to pull back if the additional stimulus proves unnecessary.
The Fed also said it would continue an earlier program of using proceeds from mortgage-related holdings to buy more Treasury debt, at rate of $35 billion a month, which avoids tightening the money supply and further muffling the recovery.
The Fed's policy statement admitted that the recovery had been slower than it anticipated but that inflation, the threat central bankers are most sensitive to, remains quiescent.
The Fed's move carries risks, especially in gauging when to unwind its huge holdings, but with the tepid recovery of paramount concern and Democrats and Republicans at an impasse over what to do, the Federal Reserve has stepped into the breach.
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