US Fed And US Economy: Fed Speak And The Economy Under Obama Leadership

US Fed And US Economy: Fed Speak And The Economy Under Obama Leadership

The latest statements from the US Fed suggest that the US economy is improving gradually, with some areas of concern remaining. Accordingly, the Fed has decided not to raise interest rates, which have been close to zero for some time now.The Fed believes that while the household spending is beginning to expand at a moderate pace, it remains reined in due to the weakness in the labor markets resulting in constrained income growth. Tight credit markets and a weak housing market have added to the drag in the US economy. However, on the brighter side, business spending on equipment and software seem to be on the uptick.Given the not so bright circumstances, and notwithstanding the possibility of inflation setting in due to the excess liquidity pumped in the Fed, it has decided to take the risk of keeping interest rates unchanged. The decision implies that the prime lending rates of banks are likely to stay around 3.25%. Prime lending rates directly impact the rate, at which banks offer various loans like home loans, credit cards etc. In order to keep stimulating the economy the Fed will also continue to provide support to mortgage lending and housing markets. To this effect, the Fed will purchase up to 1.25 trillion dollars of agency backed securities. At the same time, the Fed stated that would buy the reduced amount of 175 billion dollars of agency debt, down from the 200 billion dollars it had proposed earlier.This is indicative of the fed beginning to wind down some of its stimulus in order to curtail some amount of liquidity. The Fed is also likely to dismantle some of the other emergency lending programs as and when they reach their expiry.The Fed's decisions come on the back of the US economy having grown 2.2% in the third quarter of the previous year after four consecutive quarters of contraction. US GDP contracted by 6.4% in the first quarter of 2009 followed by a contraction of 0.7% in the second quarter.The US economy had also shrunk in the last two quarters of 2008 by 2.7% and 5.4% respectively. Thus, while the recession may have ended, the third quarter growth of 2009 needs to become sustainable and the Fed's action of maintaining low interest rates for some more time could help get the economy into a positive growth cycle. Taking a cue from the weakness in the labor markets, the US president has proposed a host of reforms for revving up the jobs market. One of his proposals includes 30 billion dollar package to help small businesses get loans aimed towards creating more jobs.Obama's proposal also suggests reducing tax breaks for corporations, which are known to outsource from nations like India and effectively ship jobs overseas. Obama has also suggested serious financial reforms and that banks should not be allowed to take risks that can jeopardize the economy. He has also suggested the adoption of new technologies focused towards clean and green energy. Obama's proposals, which focused on job creation and export growth led the US dollar to pare some value as investors believed that in order to boost exports, the US might support a weaker dollar. However, the proposed jobs bill has yet to pass the test of the house before it can be implemented.

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