Week 2 - stimulate demand. The determined route is to buy...

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Jamie Riedford BTE 234 November 10, 2010 “Fed to Spend $600 Billion to Speed Up Recovery” The Federal Reserve is trying to push the economy into recovery with a bold but risky plan to pump $600 billion into banking system. This action is the second time in a year that the Fed has tried something new as it struggles to push down long-term interest rates to encourage borrowing and economic growth. The Fed is an independent body, so its policy decisions are separate from other political pressures. Because of this, Washington is relying on it to take action, but chairman Ben Bernanke explains that the Fed cannot correct the problem alone. Normally the Fed’s main action to spur economic growth is to lower short-term interest rates; but, since the rates are already near zero, they must find another way to
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Unformatted text preview: stimulate demand. The determined route is to buy government bonds, which increases the demand for them and raises their prices, pushing long-term interest rates down. The Fed will also continue with an earlier program that uses proceeds from its mortgage-related holdings to buy additional Treasury debt, at a rate of about $35 billion a month. In total, the Fed will buy $850 billion to $900 billion, which almost doubles the amount of Treasury debt it, currently holds. If the Fed succeeds, lower long-term interest rates should be present through the markets, which will push down rates for mortgages and corporate bonds. This could encourage homeowners to refinance into cheaper mortgages and push businesses to make investments rather than sitting on piles of cash....
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This note was uploaded on 02/02/2012 for the course BTE 234 taught by Professor Alanshort during the Fall '10 term at Miami University.

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