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Wall Street Responds Positively to Federal Reserve Plan

Federal Reserve chairman Ben Bernanke addresses a Federal Reserve conference in Boston, Oct 2010 (file photo)

Federal Reserve chairman Ben Bernanke addresses a Federal Reserve conference in Boston, Oct 2010 (file photo)

Global stock markets surged and the U.S. dollar fell against major currencies following a Federal Reserve decision to pump $600 billion into circulation to push interest rates lower. It is a move intended to accelerate the U.S. economic recovery, and while investors appear to be applauding the move, monetary officials in Europe and elsewhere are not.

President Barack Obama said the American people sent a loud message in this week's midterm elections - the economy is priority number one. "They want us to focus on the economy and jobs, and moving this country forward."

With a divided U.S. government come January, however, analysts say providing further economic stimulus might prove challenging. Republicans, who will take control of the House of Representatives, are opposed to new government spending initiatives. And U.S. income tax rates will increase next year, unless a deal can be struck between Congress and the White House to keep them at current levels.

If the White House and Capitol Hill appear to be at loggerheads, the U.S. Central Bank is moving forward with an ambitious plan - printing money, lots of money, to buy government securities. It is a mechanism known as "quantitative easing."

Former U.S. Assistant Treasury Secretary Richard Clarida said that with short-term interest rates already at historic lows, taking action to ratchet down long-term rates is the Federal Reserve's only option to stimulate the economy.

"Essentially, the Fed cannot cut interest rates," said Clarida. "They are at zero [percent] at the short end. So if they are going to ease [monetary] policy, they have to do it through these quantitative measures." Clarida spoke on Bloomberg Television.

The Federal Reserve's announcement on Wednesday sparked rallies in global stock markets, sent prices for commodities like oil and copper sharply higher, and caused the dollar to fall relative to major world currencies.

In an interview with The Wall Street Journal newspaper, France's Finance Minister Christine Lagarde warned that the Fed's move would put unwelcome upward pressure on the Euro. German Economy Minister Rainer Bruederle suggested that quantitative easing will produce inflation, not economic growth.

The German minister said Federal Reserve Chairman Ben Bernanke seems to believe that economies can be boosted by simply dropping money from a helicopter. The minister added that he does not share that view.

Echoing the theme, Brazil's Finance Minister Guido Mantega said the world wants to see a stronger U.S. economy. But he suggested that dumping money in Washington is not the way to do it.

Stronger currencies in Europe, Latin America and elsewhere will make their exports more expensive and threaten economic expansion.

The European Central Bank and the Bank of England are choosing against additional stimulative measures of their own, and they have decided to hold interest rates at their current levels.

ECB President Jean-Claude Trichet: "The underlying momentum of the recovery [in Europe] remains positive."

Clarida sees quantitative easing as a guard against deflation, which could cause America's economic recovery to stall.

"The Fed is much more concerned about a deflationary outcome of falling prices than it is about a rise in inflation three or four years from now," said Clarida. "And so from the Fed's point of view, with high unemployment and inflation well below its target, it should do quantitative easing. It will clearly lower rates. It will weaken the dollar. And the Fed is hoping that leads to economic growth and lower unemployment."

Analysts say that a swift drop in long-term interest rates could boost America's ailing housing market, which would brighten the nation's economic prospects. But the longer-term effect of printing money is inflation, which would have the opposite effect on interest rates.