Economic Outlook: Fed options

By ANTHONY HALL, United Press International  |  July 25, 2012 at 9:42 AM
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The U.S. Federal Reserve is gearing up for another round of economic stimulus without, of course, revealing yet what is to come.

The central bank is presumably unmatched in its ability to keep its decisions close to the vest. Nonetheless, the several options available to the Fed are fairly finite and their potential impact is shrinking.

One option kicking around, for example, is the Fed could extend generous lending rates to banks through its discount window. But banks can already get their clutches on plenty of cheap money and yet to turn that into generous lending to customers.

The Fed could also shave its federal fund rate, the critical benchmark that determines rates of quick non-collateralized loans between banks. It has been set at zero to 0.25 percent since December 2008. For years, Fed officials and Fed observers alike have assumed zero to 0.25 percent is as low as the rate can go. But the effective 0.25 percent can be trimmed closer to zero if the Fed wants to do so.

In June, the Open Market Committee agreed to extend the Fed's "operation twist" by sinking an additional $267 billion into long-term securities as short-term notes mature. Some analysts believe the Fed will wait at least two months to see how that pans out before attempting another stimulus measure.

The Fed, however, knows as well as anyone that Washington is dead on its feet. The two mighty mudslingers, President Obama and presumptive Republican presidential candidate Mitt Romney are standing 30 paces between them on Main Street and nobody is going to flinch until November. Even after that, there is hardly a credible economic plan on the table.

Further complicating matters, the most effective option the Fed can take, another round of quantitative easing, is the most unpopular politically. Foreign finance ministers immediately jump up and down because printing money to buy long-term securities tends to be viewed as currency manipulation, a move to make U.S. goods more competitive abroad. In turn, Republicans pounce on the move because it carries a potential inflation risk.

The move, however, supports the securities market and gives exports a boost, a one-two punch the Fed would find irresistible if it carried no political repercussions.

There are options with far less impact, like an announcement in effect that the federal fund rate will not be changed for yet another year, as long as inflation does not accelerate. While business would likely welcome the news, it would hardly be earth shattering.

To co-opt a phrase coined by Fed Chairman Ben Bernanke, it would not put the the economy into "escape velocity."

In international markets Wednesday, the Nikkei 225 index in Japan fell 1.44 percent while the Shanghai composite index in China dropped 0.49 percent. The Hang Seng index in Hong Kong was relatively flat, losing 0.14 percent, while the Sensex in India dropped 0.43 percent.

The S&P/ASX 200 in Australia shed 0.23 percent.

In midday trading in Europe, the FTSE 100 index in Britain added 0.3 percent while the DAX 30 in Germany climbed 0.93 percent. The CAC 40 in France rose 0.88 percent while the Stoxx Europe 600 climbed 0.27 percent.

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