What Direction Will The Fed Take With Quantitative Easing (QE3)?

pointOn Tuesday the Federal Reserve will begin their two-day June FOMC meeting to collectively deliberate about the health of the U.S.economy and chart a course for the Fed as it seeks to clarify their monetary policy before a captive audience that is nervously waiting for signs about a possible exit strategy of its monetary stimulus program.

At the conclusion of the Fed meeting on Wednesday, Fed Chairman Ben Bernanke will provide some forward looking statements about the economy and explain the Fed’s role to support growth across the U.S. economy through their policy actions.

After Chairman Ben Bernanke admitted on May 22nd that the Federal Reserve may start slowing its stimulus program in just a “few meetings,” it’s been a more volatile ride in equity markets with a 2 percent pullback and the 10 year Treasury rising to the mid 2.20’s, up from 1.94 on May 21st, the day before Bernanke spoke about slowing the Fed’s $85 billion quantitative easing bond program, known as QE3.

Yesterday the 10 year Treasury closed at 2.19.

The U.S. jobs market is frequently used to gauge the effectiveness of the Federal Reserve’s loose monetary policy that has caused some recent controversy as economists debate the significance of an aggressive monetary policy amid a mixed bag of U.S. data and a housing market that is showing signs of a rebound.

Earlier this month, the Department of Labor reported that the U.S. added 175,000 jobs in May, a level that is still considered not strong enough to lower the unemployment level which moved higher in May to 7.6 percent from 7.5 percent in April.

Meanwhile, the April payroll numbers were revised lower to 149,000 payroll jobs.

Many economists believe the U.S. economy remains in a tight fiscal transitional period due to the “across the board” government sequester cuts combined with higher taxes for Americans.

More economic data may be needed to show whether the Fed’s current monetary stimulus program is sufficient enough to reverse low inflation levels (see graph) and improve market fundamentals across a slow moving economic recovery that is still dragged down by recession in much of Europe and slower growth in China.

Deficit Improvement

Last month, the Congressional Budget Office (CBO) released a revised deficit estimate for the 2013 fiscal year, ending on Sept. 30, that shows the deficit will lower to about $642 billion, the smallest shortfall since 2008, amounting to 4 percent of the nation’s GDP.

The U.S. deficit has surpassed 1 trillion over the past 4 years and simmered to the surface in 2011 when the credit agency S&P downgraded the U.S. credit rating to AA negative for failing to reach a fiscal compromise to cut the federal deficit.

The CBO’s current estimate of the U.S. deficit for 2013 is about $200 billion less than their first estimated in February 2013, largely due to better than expected revenues along with an increase in payments to the Treasury by Fannie Mae and Freddie Mac.

CBO forecasts a 2014-2023 deficit that is $618 billion lower than it first projected in February, mostly due to lower projections of spending with Social Security, Medicare, Medicaid, and interest on the public debt.

Last week the S&P credit agency upgraded the U.S. long term debt outlook to stable from negative with its AA rating.

Despite the fiscal belt tightening and tax increases that have taken some of the pressure off the federal deficit, the nation’s infrastructure is still in need of repair.

As noted yesterday on this site, the American Society of Civil Engineers (ASCE) estimated in their 2013 report card that investments for infrastructure projects due by 2020 will be a staggering 3.6 trillion.



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