Federal Reserve Seen Waiting To Stimulate Economy

Federal Reserve Building
Federal Reserve B

Washington D.C.

As the Federal Reserve wraps up their two day meeting in Washington with Fed Chairman Ben Bernanke providing some closing statements later today, the markets will pay close attention to what kind of monetary policy decisions will be made to help ease financial conditions and create a better economic environment for sustained growth.

Last month, the Fed announced the continuation of “Operation Twist” through the end 2012 with $267 billion of short term bonds being sold to purchase longer term bond, hence the term “twist”.

In mid July  Fed’s chairman Bernanke told Congress that the options that are still under consideration for the Fed includes a new round of asset purchases, or “quantitative easing” ( QE3).

However, the Fed Chairman is not expected to show any inclination to engage in another round of bond buying until the economy weakens and becomes more constrained.

Some economists believe that the Fed Chairman may decide at its next meeting in September to purchase mortgage backed securities to cut long term interest rates or else lower interest rates 0.25 basis points to encourage banks to make more loans rather than keeping money parked at the Fed Reserve.  

Bernanke testified in Congress in July that lowering the interest rate from its current 0.25 percent is one of the easing steps the Fed may undertake to lower the unemployment level.

Earlier Chairman Ben Bernanke announced that the Fed Reserve is prepared to take further action if unemployment remains high.

The Fed will have two more employment reports to examine before its next meeting in mid September, including Friday’s employment report for July. 

The July employment report consensus is for 100,000 jobs added in July.

The U.S. economy added 80,000 jobs in June and averaged 75,000 a month in the second quarter from April through June which is signifcantly lower than the 226,000 average during the first quarter of 2012.

Most economists expect the Fed to wait until September to see if the jobs picture and consumer spending begin to show signs of improving.

In June U.S. consumers spent nearly the same level as they did in May but after taking price increases into account, decreased by -0.1%. 

Household spending rose 1.5 percent from April through June.

Retail sales fell in June for a third straight month, the longest period of decline since 2008.

Last week it was announced that U.S. GDP slowed to an annual rate of 1.5 percent in the second quarter, lower than the 2 percent level in the first quarter.

U.S. Treasury Secretary Tim Geithner

Secretary Tim Geithner was recently interviewed by Bloomberg in Los Angeles.

During the interview, Geithner spoke about the need for stronger fiscal action taken by Congress to help improve U.S. economy.  

“We should do everything we can to make growth stronger, particularly given the pressure we see from Europe” he said.

Geithner believes that Congress can decide to act in the short term to help improve the financial climate in America.

“There is a lot of things Congress can do in the near term…not just the long run to make growth stronger” Geithner said.

Among his proposals is a plan to help Americans who are underwater in their homes to refinance their mortgages and benefit from today’s low interest rates. Another one of his proposals includes providing tax incentives for businesses to re-hire.

 

 

 

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