More Fed intervention

Article Index

Why the Weak Economy Will Lead to More Fed Intervention

Despite evidence that its previous actions have done little to revive the U.S. economy, the U.S. Federal Reserve is likely to take more action before the end of the year barring a swift turnaround in such indicators as unemployment, consumer spending, and housing.

The Federal Open Market Committee (FOMC) minutes from its Aug. 9 meeting, released on Tuesday, indicated that several members already favor more Fed intervention.

The FOMC discussed virtually every policy tool available to it, including a third round of bond-buying known as quantitative easing (QE3), an "Operation Twist" that involves selling shorter-term notes and using the proceeds to buy longer-term notes, and setting numerical targets for unemployment and inflation.

Some members pushed for immediate action based on worsening economic news such as a second-quarter gross domestic product (GDP) of just 1%, but others doubted that more Fed intervention would help.

"Some participants judged that none of the tools available to the committee would likely do much to promote a faster economic recovery," said the Fed. "Those critics believe that current economic headwinds can lessen only gradually over time, or that recent events had lowered the impact such moves might have."

Critics of the Fed's interventionist policies, engineered by Chairman Ben S. Bernanke, maintain that the previous rounds of quantitative easing, as well as holding interest rates at between 0% and 0.25% have been ineffective, if not harmful.

"Bernanke's first two rounds of quantitative easing had three major consequences: higher inflation, higher unemployment, and higher borrowing costs for average Americans," said Money Morning Global Investing Strategist Martin Hutchinson.

To continue reading, please click here...