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Business News/ Politics / Policy/  US Fed resumes massive spending to spur recovery
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US Fed resumes massive spending to spur recovery

US Fed resumes massive spending to spur recovery

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Washington: The US Federal Reserve has agreed to pour an additional $600 billion into the US economy, a bold but risky step aimed at keeping a fragile recovery moving and easing high unemployment.

The Fed’s top policy panel cast aside its long-held reluctance to micro-manage the economy, as members faced down the prospect of a lost decade of growth.

The Federal Open Market Committee (FOMC) said Wednesday it would buy up new Treasury debt at a rate of around $75 billion a month, a scale not seen since the depths of the 2008-2009 economic crisis.

While the Fed took similar measures during the crisis and has rolled over those expiring purchases, the expanded spending is unprecedented when the economy is not teetering on the edge of collapse, and redefines the bank’s role.

The move followed Tuesday’s mid-term elections in which control of the House of Representatives shifted to Republicans, who have called for less government interference in the US economy.

Fed chairman Ben Bernanke, in an opinion piece appearing in Thursday’s Washington Post, said the central bank took the extraordinary steps because it has “a particular obligation to help promote increased employment and sustain price stability."

This effort, described by some as “quantitative easing," was less familiar to the public but was effective in helping the economy weather the economic crisis, he said.

“This approach eased financial conditions in the past and, so far, looks to be effective again," he wrote.

“Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance," he said.

“Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.

That, he said, “will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion."

Though the plan was worth slightly less than some investors had expected, major US stock markets rose modestly higher in the hours after the news.

“The net new QE is a bit lower than some expected but will be enough, in our view, markedly to boost... growth," said Ian Shepherdson, chief US economist with High Frequency Economics.

Asian stock markets on Thursday welcomed the move, with Tokyo shares soaring 2.17% and Hong Kong gaining 1.62%.

Europe’s main stock markets also accelerated opening gains as investors welcomed news of the Fed move.

The measure will push total Fed spending up to nearly a trillion dollars by next July. The Fed had already poured in more than $1.5 trillion to spark a recovery.

Fed members, warning that the pace of the recovery “continues to be slow," agreed to buy up longer-term bonds, in addition to the roughly $35 billion in debt that will expire each month.

But the Fed’s gambit raised protests from at least one FOMC member who fears it is an overreaction that will fuel long-term inflation.

In a statement, the Fed said panel member Thomas Hoenig voted against the measures because he “believed the risks of additional securities purchases outweighed the benefits."

The Kansas Fed chief expressed concerns that the spending “over time would cause an increase in long-term inflation expectations that could destabilize the economy."

The Fed’s actions also risked fueling anger after congressional and local elections saw strong gains for candidates who backed limited government and low spending.

Though the Fed’s spending does not directly contribute to the US deficit or debt, critics say the outlays are symptomatic of Washington’s willingness to embrace profligate spending.

With politicians unwilling or unable to approve a new rash of stimulus spending to help decrease joblessness or the risk of deflation, Bernanke’s supporters had called on the Fed to act.

Since Bernanke first suggested the possibility in late September, and confirmed it in October, markets and most economists had penciled in another round of quantitative easing (QE) as a solid bet.

Modest third-quarter economic growth had bolstered expectations of further Fed stimulus to lower long-term interest rates and fight off deflationary pressure in the slack economy.

The world’s largest economy grew at a 2% annual rate in July-September, slightly more than a 1.7% expansion in the second quarter.

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Published: 04 Nov 2010, 05:22 PM IST
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