Article by AlgosysFx
One sentence elicited an audible gasp of excitement when economists at Bank of America piped headlines from minutes of the Federal Reserve’s June meeting down to the firm’s trading floor- the Fed was exploring new tools to support growth. Investors are now trying to cull hints about what Fed Chairman Ben Bernanke, who showed a willingness to stretch the boundaries of conventional monetary policy during the financial crisis, might have up his sleeve. Two principal options have emerged as eligible candidates: following the Bank of England’s lead in some sort of funding for lending plan that favors banks that are actively making loans; or lowering the rate the central bank pays financial institutions for parking their reserves at the Fed, currently at 0.25 percent.
The search for new tools is in part a response to the severe negative reaction the US Central Bank received both at home and abroad from its second round of bond purchases. The Fed says it is still considering another bout of QE3, and some analysts expect recent weakness in the US economy could prompt policymakers to launch such a program as early as September. However, seeing an economy that continues to show resistance to monetary stimulus, officials are already starting to think about what other steps they might take down the line to keep the recovery on track.
US gross domestic product expanded just 1.9 percent in Q1, and economists believe Q2 growth is going to be even softer. At the same time, recent progress on bringing down the jobless rate, now at 8.2 percent, has stalled. Against that difficult backdrop, made even more tenuous by Europe’s ongoing sovereign debt debacle and a slowdown in large emerging economies, it’s no wonder Fed policymakers are scrambling to restock their depleted toolkit.
Some express that the funding for lending might be a more prudent approach than just buying up securities without any strings attached. Previously in response to the
financial crisis and deep recession of 2007-2009, the Fed cut official borrowing costs to effectively zero and bought some $2.3 Trillion in mortgage and Treasury securities in an effort to keep long-term rates down and boost economic activity.
A recent poll of US primary dealers, banks that do business directly with the Fed, found that 70 percent expect another round of stimulus via bond buys. However yields
on Treasuries are at or near record lows, which casts doubt on what good yet more purchases can bring.
Article by AlgosysFx