The Federal Reserve Announces New Monetary Stimulus Plan
The Federal Reserve Announces New Monetary Stimulus Plan
Recent developments by the Federal Reserve reveal that the Fed considers launching a sweeping novel turn of bond buying. The launching of QE3 will stimulate the economy of the United States of America. According to the Federal Reserve, the new monetary stimulus plan would maintain interest rates at an exceptionally low level. This move would go on until at least mid 2015 (David, 2012). Tightening of this policy would only follow economic recovery establishment. In this policy, the Federal Reserve monetary policy committee quoted a high and stringent level of unemployment. It then hinted an action plan in case the economy was not stable enough to revitalize the labour market. This comes after extensive research in the labour market revealed that Americans have a large disparity in work-income preferences. However, the Federal Reserve Committee chairman-Ben Bernanke asserted that the new policy would not be exclusive in solving all the problems experienced in the economy of the country. The only move would be for the Fed to offer some support that can alleviate the situation.
Bernanke cautioned against financial precipice of automatic expenditure reduction and tax increments proposed for implementation the following year. He said that the Federal Reserve had no equipment to cope with a substantial financial shock (Gilbert, Kliesen, Meyer & Wheelock, 2012). This would have a massive negative impact to the general economy of the country unless the congress moved in to provide a solution. Not all was at a loss after the announcement of launching a new monetary stimulus policy. The stock market was a key beneficiary after the announcement. This is evident in the S&P share index rising to close at 1.6% higher than its previous market share. Now, the United States was experiencing a financial cliff. It is imperative to take action, which will curb the situation since this would cause a significant increase in taxes as well as cut down on expenditure by the beginning of the New Year. According to the CBO, allowance of this situation to happen would result into increased unemployment rates. This threatens to take the economy of the United States back into the recession period of the 1930s. Although there were many criticisms about the launch of the new policy for monetary stimulation, the Federal Reserve opts to stick on the plan so that there is continuous stimulation of the country’s growth. This move should continue at least until the job market experiences improvements (David, 2012).
There should be enough accommodation of the policy to avoid negative impacts on the growth of the economy. There is still an effect following the announcement. The stock markets reveal that the US stocks edged lower. This followed extended gains against the Euro by the dollar. However, treasury bonds remained the same closing the entire session lower. According to analysts of the announcement, months to follow the announcement would be more eventful especially holding of meetings as the Federal Reserve makes decisions on the way forward after separation of Operation Twist program (Gilbert, Kliesen, Meyer & Wheelock, 2012). In this case, the Fed opts to purchase long-term treasury debt with profits from short-term securities before they expire at the end of the year. This implies that officials have to decide whether QE3 will incorporate treasury purchases upon expiry of the Operation Twist at the end of the year.
References
David, G. (2012). The Federal Reserve Bank’s New Monetary Policy Tool. Journal of Business & Economics Research; Sep 2012, Vol. 10 Issue 9, p 533-537, 5 p
Gilbert, R., Kliesen, K. L., Meyer, A. P., & Wheelock, D. C. (2012). Federal Reserve Lending to Troubled Banks during the Financial Crisis, 2007-2010. Federal Reserve Bank Of St. Louis Review, 94(3), 221-242.
