Washington – The Federal Reserve has announced that it will pump $600 billion (BDS $1 200 billion) into the United States (US) economy by the end of June next year to try to boost the fragile recovery.
This stimulus, which equates to $75 billion a month, is slightly more than many economists had expected.
The US economy grew by an annual rate of two per cent between July and September, which is not enough to reduce high unemployment.
Interest rates are already close to zero, which means the Fed cannot reduce rates any further in order to boost demand – the more traditional policy used by central banks to stimulate growth.
Instead, it has announced a fresh round of QE, in which it will create money to buy long-dated government bonds. The move was widely expected.
The programme has been dubbed QE2, after the Fed pumped $1.75 trillion into the economy during the downturn in its first round of QE.
To reduce the cost of borrowing – buying government bonds increases their price and lowers their yield, or the interest they pay out, which in turn puts downward pressure on interest rates across the economy.
To inflate asset prices – with bonds paying out lower interest rates, investors look to buy other asset classes, such as equities, pushing prices up.
To increase lending – by paying money to banks to buy bonds, the banks then have more money to lend to businesses and individuals.
The Fed said in a statement that the “pace of recovery in output and employment remains slow. Household spending is increasing gradually, but remains constrained buy high unemployment, modest income growth, lower housing wealth and tight credit”. (BBC)
