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March 31, 2016

Is Fed Considering Another QE?

Seeing a weak economy and struggling middle class, the Federal Reserve is considering measures to stimulate the economy. In a speech earlier this week, Janet Yellen, Chair of the Federal Reserve, said the Fed has "considerable scope" for stimulating the economy, hinting that something akin to the Quantitative Easing programs of the late 2000s and early 2010s may be in the cards in the near term.

The speech was a sharp reversal from the Fed's official view in December, which stated that the economy was doing extremely well and there was justification for raising borrowing costs on American consumers. Now the Fed sees uncertainty in the economic future of the United States, as high paying manufacturing jobs vanish, the energy sector is decimated by cheap oil, export demand wanes, and broad GDP growth weakens.

"Manufacturing and net exports have continued to be hard hit by slow global growth and the significant appreciation of the dollar since 2014," Yellen said in a speech. She went on to add that the country's dependence on global demand has rendered it victim to a broad slowdown as a commodity glut pressures emerging markets and a burst stock bubble in China weakens growth in Asia.

"These same global developments have also weighed on business investment by limiting firms' expected sales, thereby reducing their demand for capital goods; partly as a result, recent indicators of capital spending and business sentiment have been lackluster," Yellen said.

The weakness in the global economy has been a significant drag on businesses in America, which has partly contributed to deflationary conditions for producers. "Business investment has been held down by the collapse in oil prices since late 2014, which is driving an ongoing steep decline in drilling activity.

Low oil prices have also resulted in large-scale layoffs in the energy sector and adverse spillovers to output and employment in industries that support energy production," Yellen said.

Because of "less favorable" economic developments in 2016, the Fed may consider more aggressive monetary stimulus to kick start investment and inflation.

Janet Yellen also expressed concerns that a weak global environment could further depress wages for Americans, which have already fallen in real terms over the last 17 years. "And if foreign developments were to adversely affect the U.S. economy by more than I expect, then the pace of labor market improvement would probably be slower, which would also tend to restrain growth in both wages and prices," she said.

Wage growth has remained weak so far in 2016, rising below the rate of inflation. Expectations of weak wage growth persist, even as the unemployment rate continues to fall. Lower unemployment and lower wages are projected by most analysts at investment banks, which are also perceived as a general drag on consumer spending and the economy as a whole.

While Yellen's remarks were extremely cautious, the stock market rallied as the Fed chairwoman again signaled that interest rates are likely to remain at their current level in the short term, although Yellen also hinted that the economy could reverse and improve later in the year. If that were to happen, the Fed would continue to raise interest rates, thus making investment and borrowing more expensive for both the American public and American companies.

Courtesy of Economy Watch

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