Investments: US Federal Reserve Offers Stimulus Plan

US Economy Needs a Boost

US Economy Needs a Boost

In order to help stimulate the US economy, which is currently struggling, the Federal Reserve has set out a scheme called “Operation Twist”. Both US and Asian shares fell after this news, which does not pump money into the economy, but attempts to keep interest rates low.

Selling Rather Than Buying

The Federal Reserve is going to sell around $400 billion, or £260 billion in bonds which mature in three years. They will use the money to purchase longer-term debts, aiming to increase mortgage lending and business loans to help the economy. However, due to the warning on the financial status of the economy that came with this suggestion, the Dow Jones fell 2.5%. The Nikkei also fell by 2% in Japanese late trading.

The purchasing of these bonds will increase their prices, lowering interest rates or yields. The government is debating this option, as Republicans have asked the Federal Reserve not to intervene in any more aspects of the economy. The Operation Twist plans are larger than expected. The government has already put tens of billions into the economy, with two rounds of quantitative easing (QE). Through QE, the government buys assets and increases demand, stimulating economic growth.

Concern Over The Policy

Experts had anticipated yet another round of QE, expressing concern over the potential for success of the new policy. According to Bernard Baumohl, chief global economist with the Economic Outlook Group said “Frankly I don’t see it having any meaningful impact on the economy.”

Other analysts agree, with Paul Ashworth from Capital Economics believing the government is off base, saying, “The cost of borrowing simply isn’t the problem. Businesses don’t have the confidence to invest and half of all mortgage borrowers don’t have the home equity needed to refinance at lower rates.”

Operation Twist has been used before. The first introduction of the measure was in the 1960s, and named after the dance, which had become popular at the same time. The International Monetary Fund (IMF) cut estimates for Europe, Japan, and the US earlier in the week, prompting reactions from governments. The US has not considered a third round of QE. However, in contrast, the Bank of England has begun to consider QE to help boost the UK economy.

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