Slowing economy could force Fed to take action

[Shadow]

With the dark cloud (http://www.debatepolicy.com/#) of Europe’s ongoing financial crisis still hanging over the world financial system, the Federal Reserve opens a two-day meeting Tuesday with speculation swirling that policymakers could announce more stimulus to boost the U.S. economy.
A crucial Greek election over the weekend eased fears of an imminent financial (http://www.debatepolicy.com/#) disaster in the eurozone by handing victory to New Democracy, a center-right party that supports Greece staying in the currency union. That means, for now at least, investors can stop worrying about the market chaos that would follow a Greek decision to leave the eurozone.
Now the focus shifts to the Fed and how it might play its next hand

Recent reports, including two straight months of weak job growth (http://economywatch.msnbc.msn.com/_news/2012/06/01/12006830-us-job-market-all-but-stalls-in-may?lite), suggest economic growth is slowing again after a tepid recovery. That sets the stage for Fed Chairman Ben Bernanke to ask central bankers to approve more stimulus, although the options are limited. In testimony this month Bernanke said the Fed stands ready to act (http://economywatch.msnbc.msn.com/_news/2012/06/07/12104739-chairman-bernanke-says-fed-is-ready-to-act?lite)if needed.
Opinions are divided over what the Fed will do.

http://economywatch.msnbc.msn.com/_news/2012/06/19/12282434-slowing-economy-could-force-fed-to-take-action?lite

[mundame]

I don't see what the fed CAN do, except presumably print money out of thin air. It can hardly lower interest rates much at this point.

I suppose this is just the usual talkie-talkie to try to boost the market and general business optimism.

In fact, there is an unlikely stock market rally going on: it's now 12,800 or thereabouts, but why? Near 13,000 again and nothing but bad stuff going on? Weird.

[Shadow]

I don't see what the fed CAN do, except presumably print money out of thin air. It can hardly lower interest rates much at this point.

I suppose this is just the usual talkie-talkie to try to boost the market and general business optimism.

In fact, there is an unlikely stock market rally going on: it's now 12,800 or thereabouts, but why? Near 13,000 again and nothing but bad stuff going on? Weird.

Not really lower them...just extend the policy that they put in place,but that is set to expire EOM. And yes...they do intend to print money out of thin air apparently. Second option...


Others are hoping for something stronger, such as another massive bond-buying program known as “quantitative easing,” or QE, in which the Fed essentially prints money to buy long-term mortgage or Treasury bonds.

Interesting how both of these ideas are said to likely bring more inflation down the road...but are seen as 'fixes'.

[Thunderknuckles]

I was watching Ben Bernanke teach a class on the history of central banking, the gold standard, and the Fed. It was very fascinating and informative. What did strike me is that central banks, the Fed in particular, don't seem to have a really good idea on how their policies will affect current economic stability. Bernanke covered many historical bank runs, recessions, and depression both here and abroad and discussed how, in hindsight, a central bank, or lack thereof, failed to meet a given economic crisis. The lessons learned from a given historical example would then be applied to the next economic crisis. A central bank would again fail to meet the challenge properly and another lesson would be learned which would then get applied to the next crisis. So on and so forth until present day. I now have a pretty good idea on why the Fed does what it does today.

This all begs the question of what will be learned in hindsight after the Fed fails to meet this particular economic challenge properly :p

[fj1200]

This all begs the question of what will be learned in hindsight after the Fed fails to meet this particular economic challenge properly :p

Hopefully that the Fed has done all it can and the failure is our fiscal policy. :cough: taxes and regulations :cough:

[Kathianne]

Not really lower them...just extend the policy that they put in place,but that is set to expire EOM. And yes...they do intend to print money out of thin air apparently. Second option...



Interesting how both of these ideas are said to likely bring more inflation down the road...but are seen as 'fixes'.

It's pretty much just the government 'easing':

http://useconomy.about.com/od/glossary/g/Quantitative-Easing.htm


What Is Quantitative Easing?Definition: The Federal Reserve (http://useconomy.about.com/od/governmentagencies/p/fed.htm) used quantitative easing to stimulate the economy after the financial crisis of 2008. What is quantitative easing? It is defined as when the Fed bought bonds, such as bank loans, mortgage-backed securities (http://useconomy.about.com/od/glossary/g/mortgage_securi.htm) (MBS (http://useconomy.about.com/od/glossary/g/mortgage_securi.htm)), and U.S. Treasury notes. The Fed issued credit through its Trading Desk at the New York Federal Reserve Bank. Where did the money come from to purchase these assets? The Fed simply created it as credit.

This has the same effect as printing money (http://useconomy.about.com/od/glossary/g/Federal-Reserve-Printing-Money.htm) -- it increases the money supply (http://useconomy.about.com/od/monetarypolicy/f/money_supply.htm). The Fed hopes that the banks (http://useconomy.about.com/od/glossary/g/Banking.htm) who receive the credit will use it to make more loans. Unfortunately, it hasn't quite worked as well as planned. The banks have held onto the extra credit, using it to write off foreclosures or simply saving it in case they need it. The banks complain they can't find anyone credit-worthy enough to lend to. Of course, they've also raised their lending standards much, much higher than in 2007...


In other words, 'cheap money', which is why:

http://www.cnbc.com/id/47876204


Euro rises on Greek news; dollar down ahead of Fed
Published: Tuesday, 19 Jun 2012 | 12:31 PM ET

...

FED EASING EYEDThe Fed will announce its policy decision on Wednesday afternoon, and some market players have speculated it could opt for a third round of quantitative easing as Europe's troubles pose a risk to growth in the United States, the world's largest economy.


"There is positioning ahead of the Fed, with the dollar unable to capitalize on euro-negative sentiment ahead of the Fed," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "The risk is relatively high that officials will signal the need for more stimulus."


Another round of monetary stimulus would weigh on the U.S. dollar and boost growth-linked currencies like the Australian dollar.


The dollar index <.DXY>, which measures the greenback against a basket of major currencies, was down 0.7 percent at 81.345, having struck a one-month low of 81.266 on Monday.


The dollar edged lower against the yen, easing 0.3 percent to 78.91 yen. A drop below 78.61 yen would take it to its lowest level in two weeks.


Interest rate differentials moved against the dollar on expectations of more Fed easing. The Australian dollar jump to a six-week high of US$1.0147.


Meanwhile, against the backdrop of slowing growth, the Group of 20, the world's major economies, is set to urge Europe to take "all necessary policy measures" to resolve its woes and U.S. President Barack Obama requested a meeting with its leaders.

[logroller]

I think of QE as pumping water out the ground and air dropping it to ease the woes of drought.