US Central Bank Unveils $600bn Cash Boost
10:28pm UK, Wednesday November 03, 2010
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The extra cash – to be in place by the middle of next year – is designed to reignite weakening economic growth and reduce unemployment, which remains high.
Formally known as unconventional monetary easing, the process of injecting cash into the economy involves America’s central bank creating new money to purchase government debt, known as treasury securities, back from investors.
Most analysts had predicted an influx of $500bn (£312bn), but it is a gradual programme rather than the shock-and-awe style one-off payment that some had expected.
“There is no doubt people’s number one concern is the economy – but we have not made as much progress as we needed to make.” The President reacts to his mid-term poll losses.
Describing the economy as “slow”, the Fed stated it plans to purchase about $75bn (£46bn) in bonds every month and review the amount and pace regularly.
Some observers had claimed there could even be a figure for a third wave of spending in the future, but nothing concrete has been stated on that.
Martin Wolf, chief economics commentator for the Financial Times, stated the policy will be “ineffective rather than dangerous” and the threat of inflation is “very low”.
Never state never. If there is a significant slowing in the economy then I would anticipate quantitative easing to return (in the UK).
Martin Wolf, chief economics commentator for the Financial Times
Speaking on Jeff Randall Live, he said: “The problem is that it is not going to stimulate the economy very much, which is the really huge concern about the policy.”
But some believe the move increases the pressure on the UK to follow suit – and Bank of England governor Mervyn King recently stated there is “too little” money in circulation and that quantitative easing (QE) remained a “potent weapon” at his disposal.
At least one member of the Bank’s decision-making Monetary Policy Committee states that more cash is needed, despite already injecting £200bn.
The Fed is trying to breathe new life into a ‘slow’ economy
Mr Wolf stated pumping more cash into the British economy is “clearly off the table right now” due to it being in “pretty robust shape” – but he predicted the Bank would stay in “wait and see mode”.
He said: “Never state never. If there is a significant slowing in the economy then I would anticipate QE to return here.”
QE is a last resort for central banks in troubled economies, when other policies like ultra-low interest rates are not enough to kick-start growth.
It’s 20% higher than expected but the markets will not be massively perturbed – it’s only made-up money anyway!
Tadhg Enright, Sky News Online
The risks are a devaluation of the US dollar and rising consumer prices, as money is in greater supply and perceived to be less valuable.
The dollar has lost 7% of its value against a group of other major currencies since August 27, when the Fed’s chairman Ben Bernanke signalled that he was considering the second wave of QE.
The first wave ended in March after a year-long programme that saw the Fed purchase $1.5 trillion (£960bn) of treasury and mortgage securities in the wake of the collapse of Lehman Brothers.
source : news.sky.com
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Submited at Thursday, November 4th, 2010 at 12:00 am on Business by nuterman
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