By: Dr. Mike Campbell
With all the drama playing out on the European stage, it is easy to forget that we are “recovering” from a global financial crisis. The world’s largest economy is far from immune from the problems afflicting economies and markets around the world. The US has its own debt mountain that makes the Greek problem look like a pocket-money issue: the US debt is approximately $14 trillion – more than 50 times the Greek debt. US unemployment stands just above the 9% threshold and US economic growth is anaemic at best.
The Federal Reserve has announced that their interest rate policy will continue unchanged for another month. This means that interest rates will be held within the 0 to 0.25% range, where they have been since December 2008. The current quantitative easing programme in which the Federal Reserve pumps money into the economy by having banks buy bonds is also set to continue.
The new component to what the Federal Reserve has to say is that it has downgraded its own forecast for growth and now believes that the unemployment situation will be worse than it had anticipated. Earlier forecasts suggested that growth would be 2.6 to 2.7% this year and 3.5 to 3.9% next year; the Fed now suggests that growth will be one percentage point lower than anticipated. In terms of unemployment, it is predicted that the current 9.1% will remain unchanged this year and will remain between 8.5 to 8.7% next year – earlier projections had suggested that it would fall to 7.8% next year as the recovery started to gain traction.
Operation Twist is set to continue. This initiative seeks to pump $400 billion into long term bonds in a bid to keep borrowing costs down (by creating demand). It is hoped that this will encourage borrowing and investment within the private sector.