Fed_Weighs_Growth_Risk

FED WEIGHS GROWTH RISK The article was written by Jon Hilsenrath from the Wall Street Journal on June 15th, 2010. The centralized theme of the article pertains to ensuring that the Federal Reserve is keeping the economy on track to a lasting recovery. With the help of economists next week, the Federal Reserve will be surveying the current economic state of affairs. They will be discussing the ongoing threat of rapid deflation, national unemployment, and short-term/long-term interest rates. They are silently weighing options in preparation for any economic stumble in hopes to maintain market stability and promote ongoing growth. The “What-If Strategy” consists of: the Fed reinvesting its cash from maturing mortgage bonds into new bonds, buying more debt, and the Central bank being explicitly clear about its rates and duration. It is believed that these strategies will slow deflation stabilizing the market, and ultimately motivate businesses to reinvest in growth, alleviating the national unemployment issue. Currently, the Federal Reserve isn’t reinvesting the cash it receives when mortgage-backed securities are paid off by borrowers. The stagnant cash is expected to be approximately $200 billion through 2011. It is thought that if the Fed reinvested that cash into new bonds it would potentially hold interest rates down while bringing in much needed cash into the financial system. That cash could be used to purchase much needed resources or stimulate other positive economic growth instead of remaining stagnant. Another viable option being considered is buying more debt. Back in 2008 the Fed acquired $1.25 trillion in mortgage-backed securities as well as buying debt issues from Fannie Mae and Freddie Mac. These steps are believed to have helped keep the long-term interest rates low. However, there isn’t irrefutable evidence that this decision would have the same effect as it did in 2008 and 2009 due to rates already being quite low at 4.7% from 5.2% in early April. Finally it is being brought to attention that the central bank could strengthen reassurance in the economy by being explicitly clear when speaking in terms of keeping short-term interest rates low. In the past, the central bank has used phrases such as “an extended period” when referring to duration. Having a definitive scope of time could encourage businesses to weigh their options more precisely and motivate reinvestment, thereby stimulating job growth. Much of the focus seems to be in stabilizing the markets in the midst of all this economical unrest. Most people and businesses are remaining conservative in regards to their expenditures. They are instead preoccupied with inflation/deflation, increasing opportunity costs, and unemployment. Taking on new debt seems out of the question for most people especially in such a tumultuous time. However studies are indicating that stabilizing prices, reinvesting to generate revenue, and ultimately restoring confidence in the market will slowly drag the economy from this slump.