The Fed acknowledged an improving labor market and rising oil prices while also downplaying the threat of spillover effects from Europe, that is, now that the European Central Bank has finally seen fit to print up more than a trillion dollars for the greater good.
Well, so much for Ben Bernanke and the brain trust at the Federal Reserve not wanting to appear overly concerned about the flagging economic recovery in the U.S. and not wanting to set expectations too high for QE II (i.e., trillions more in money printing).As shown to the right, it will be just months before Bernanke outdoes his predecessor, former Fed Chief Alan Greenspan, in keeping rates lowest the longest.
But, the big news was a major downgrading of the economy’s performance and a new policy aimed at keeping the Fed’s $2.3+ trillion balance sheet from shrinking.
The Federal Reserve kept its key interest rate near zero Wednesday, and said in a statement that although the U.S. economy remains weak, there are signs of a recovery.The central bank said that the pace of the nation's economic decline is slowing and that household spending is showing signs of stabilizing.
It also said conditions in financial markets have generally improved in recent months, and that while businesses continue to cut back staff and spending, their inventories are coming into line with demand...
The Fed has now kept its federal funds rate, an overnight lending rate that impacts rates on various consumer and business loans, in a range of 0% to 0.25% since December. And despite suggesting that there are signs of progress, the Fed reiterated that "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."
"The economy is only now beginning to show signs that it might be stabilizing, and the upturn, when it begins, is likely to be gradual amid the balance sheet repair of financial intermediaries and households," Kohn told a conference at Princeton University.
"As a consequence, it probably will be some time before the FOMC will need to begin to raise its target for the federal funds rate," he said, referring to the Fed's policy-setting Federal Open Market Committee...
"To ensure confidence in our ability to sustain price stability, we need to have a framework for managing our balance sheet when it is time to move to contain inflation pressures," he said.
U.S. Treasury Secretary Timothy Geithner said Tuesday it is imperative for the government to reduce over time the debt that is piling up as a result of the government's response to recession and financial market turmoil...The plan envisions reducing the annual federal deficit to $533 billion by 2013. Mr. Geithner said that would cut in half the $1.3 trillion portion of the deficit for 2009 that he said the administration has "inherited," or budgetary factors that were in place as a result of decisions made during the previous administration.
The Obama administration estimates that the total deficit for 2009 is $1.75 trillion, taking into account the cost of economic stimulus legislation signed by the president last month...
"Failure to reduce deficits to this level would result in higher interest rates as government borrowing crowds out private investment, leading to slower growth and lower living standards for Americans," he said.
My thoughts: Honesty from the White House? Did not expect that. I think it is reasonable to lay $1.3 trillion of the FY2009 budget deficit on Bush. When the finally surpasses the $2 trillion mark will they sing the same tune? The FY 2010 budget is about $3.9 trillion amost a full trillion more than the current budget. This does not sound like a budget made by people concerned about the deficit.
The Bank of England cuts its key rate by a half percentage point to 1.5%, the lowest level in the bank's 315-year history, marking the latest in global policy makers' efforts to fend off the threat of deep recession.
The central bank typically sets a specific target for its federal funds rate instead of a range. The rate had previously been at 1% and this marks the first time the Fed has cut rates below 1%. Most investors were expecting the Fed to cut rates to either 0.25% or 0.5%.
The federal funds rate is an overnight lending rate used as a benchmark to set rates for a variety of loans, including adjustable rate mortgages, credit cards, home equity lines of credit and business loans. This marks the tenth time it has cut rates in the last 15 months.
After what is likely to be the last in a long series of interest rate cuts Tuesday, the Federal Reserve is expected to continue its new, perhaps more effective monetary strategy: printing lots of money.The Fed traditionally uses its rate-cutting tool to encourage lending and boost the economy. But despite a staggering 4.25 percentage points of cuts since September 2007, the economy has not improved - in fact, it has gotten worse, drifting in to a recession last December.
Economists expect the Fed to produce one more cut to its benchmark funds rate at the conclusion of its Federal Open Market Committee meeting Tuesday, trimming the rate to 0.5%, the lowest level on record. Whether one last rate cut will help stimulate economic growth remains to be seen.
At any rate, the Fed will likely continue to use its new favorite tool, quantitative easing, "Fed-speak" for pouring new money into the economy.
My thoughts: Inflation has been the number one threat since the Fed started cutting interest rates. A market correction was needed, but the Fed tried to delay it; thus making matters worse in the long run.
The rate cut put the central bank's federal funds rate at 1%. That matched the lowest level for this overnight bank lending rate ever -- the last time it was at 1% was from June 2003 to June 2004.
The cause of the business cycle has long been debated by professional economists. Recurring successions of boom and bust have also mystified the lay person. Many questions persist. Are recessions caused by underconsumption as the Keynesians would have us believe? If so, what causes masses of people to quit spending all at the same time? Or are recessions caused by too little money in the economy, as the monetarists teach? And how do we know how much money is too much or too little? Perhaps more importantly, are periodic recessions an inevitable consequence of a capitalist economy? Must we accept the horrors associated with recessions and depressions as a necessary part of living in a highly industrialized society?
Concerns about aggregate money supply levels and aggregate spending might make for interesting conversation, and a discussion of these matters might even reveal certain threads of truth, but they are inadequate in arriving at the cause of the boom and bust cycle that seems to pervade the economy in modern times. Economists in the Austrian school of thought have provided an explanation that bases economic fluctuations on microeconomic theory that is firmly grounded in principles of human action. These economists have pointed out that macroeconomic fluctuations, or what have come to be known as business cycles, are caused by extraneous manipulations of interestrates in the economy.[1] This manipulation of interest rates might entail conscious actions by governmental authorities or merely the result of governmental actions taken with other goals in mind...
Changes in the supply of money in the economy do have an effect on real economic activity. This effect works through the medium of interest rates in causing fluctuations in business activity. When fiat money is provided to the market in the form of credit expansion through the banking system, business firms erroneously view this as an increase in the supply of capital. Due to the decreased interest rate in the loan market brought about by the fictitious “increase” in capital, businesses increase their investments in long-range projects that appear profitable. In addition, other factors as well can cause a discrepancy between the natural rate of interest and the rate which is paid in the loan market. Government policies with regard to debt creation, monetization, bank deposit guarantees, and taxation, can effectively externalize the risk associated with running budget deficits, thus artificially lowering loan rates in the market.
Either of these two influences on interest rates, or a combination of the two, can and do influence economic activity by inducing businesses to make investments that would otherwise not be made. Since real savings in the economy, however, do not increase due to these interventionist measures, the production structure is weakened and the business boom must ultimately give way to a bust.
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The Federal Reserve, working in coordination with other central banks worldwide, enacted an emergency interest rate cut on Wednesday.
The Fed lowered its fed funds rate by half of a percentage point to 1.5%. This rate is the central bank's key tool to affect the economy. Lowering the rate pumps money into the economy by reducing the borrowing cost on a broad range of loans, including credit cards, home equity lines and many business loans.
"The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability," the Fed said in a statement.
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