US Central Bank Tries Again to Boost Economy
Federal Reserve will put $600 billion more into circulation during next few months, in bid to cut interest rates, boost economic growth and cut unemployment
Unemployed people use computers and telephones to search for jobs and seek out unemployment insurance benefits at the Nevada JobConnect Career Center in Las Vegas (Sep 2010 file photo)
Last updated on: November 02, 2010 8:00 PM
The U.S. central bank announced on Wednesday that it will put $600 billion more into circulation during the next few months, in a bid to cut interest rates, boost economic growth and cut unemployment. Critics point out that interest rates are already at historic lows, and they say it is unlikely that further cuts will spur significant growth.
Federal Reserve officials are trying to speed up economic growth to cut the 9.6 percent unemployment rate.
The Fed's plan is to print more money and use it to buy government securities. That would put more dollars into circulation in the hopes of reducing long-term interest rates paid by businesses and consumers who borrow money.
Equities trader Cort Gwon of FBN Securities in New York supports the plan.
"It will bring a lot more liquidity into the markets, which will help financial firms, banks, lending," Gwon said. "It will help the general economy really get back to growth."
A large volume of money in circulation could lower interest rates much the same way a large number of empty apartments on the market would make it easier for prospective tenants to bargain for lower rents.
Lower long-term interest rates would make it easier for people to borrow the money they need to buy homes. And lower rates would enable businesses to buy equipment to expand their operations and create new jobs.
Joe Gagnon of the Washington-based Peterson Institute for International Economics calls the proposal "a step in the right direction."
"The Fed needs to do something like this," he said. "I actually think this is less than they should be doing."
Gagnon says the Federal Reserve has two jobs - to maximize employment and to keep prices stable. And he says the Fed's plan will help on both fronts. He says inflation is so low now that the economy could fall into a damaging downward spiral of declining prices and wages called deflation.
But critics, like Gerald Hanweck of George Mason University, warn that a flood of new money into the economy will more likely make the value of the dollar decline, sparking inflation.
"It does not seem to have a big benefit, but at the same time it has some costs," he said.
Hanweck says the Federal Reserve's action could do the opposite of what officials intend. That is because rapidly rising prices would make lenders worry that they would be repaid in future dollars that would be less valuable due to inflation. That would prompt banks to raise interest rates to protect their investments. And higher interest rates could stall the economic recovery.
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