By: Dr. Mike Campbell
Towards the end of last year, various economic indicators suggested that the US economy had been performing better than expected. This has led to speculation in some quarters that plans the US Federal Reserve announced in November for a second round of quantitative easing would be put on hold.
However, minutes of a Federal Reserve meeting held last month, indicate that the Reserve has decided that it must press-on with the strategy.
Despite better than expected figures from some quarters of the US economic mosaic, the unemployment figure remains perilously close to 10%. Whilst the figures are better than many anticipated, they are still weak in comparison with pre-crisis data. The second round of quantitative easing will see up to $600 billion injected into the US economy by June.
This money will be provided to the banks to buy government bonds with. The commission that the banks earn from providing these services should improve their liquidity which will mean that they have more cash to loan to business, helping to prime the economic cycle.
However, critics of quantitative easing say that it is nothing short of printing money. The move will increase (so it is hoped) demand for US government bonds (debt) and this will mean that the yield will fall, making it cheaper for the government to service its debts.
The purchase of these government assets is thought likely to cause the Dollar to depreciate against other major currencies (though, frankly, the logic of this is a little cloudy), making US exports cheaper in importing markets and (hopefully) increasing demand for US goods. In its turn, this ought to lead to the creation of jobs to satisfy increased demand. As they say; “watch this space”.