Federal Reserve Continues Bond Buying Program As GDP Shows Minimal Growth

In a policy meeting, the Federal Reserve maintained its current policy of bond-buying and low interest rates, as GDP was published to have grown 1.7% last quarter.

Ben Bernanke, troubled

Federal Reserve Chairman Ben Bernanke, shown here in a file photo, is maintaining the monetary status quo. (Source: Reuters)

The Federal Reserve is always running along the edge whenever it comes to its policy.  Lately, they have instituted a policy of bond-buying and historically low interest rates to placate investors on Wall Street, not necessarily to the benefit of the average person.  With today's bi-monthly meeting, they reiterated this same policy in a statement, with bond-buying at $85 billion per month, and interest rates at 0.25%.  There were some differences though in the statement.  One was describing economic activity as "expanded at a modest pace," rather than "moderate" pace as in the previous monthly statement.  Another was that the general outlook expected economic activity to "pick up."

This mixed message on bond-buying and interest rates expectedly left mixed results on Wall Street, with little change.  The issue at the heart of the meeting was whether the Federal Reserve would move to begin "tapering" its bond-buying, which would no doubt send a message to Wall Street that it is trying to normalize things, and think the economy has rebounded from the Great Recession of 5 years ago.  The issue was essentially punted, according to analysts, to the next meeting in September, and by doing so, many issues will be addressed by then to ease the situation:

It is highly probable that the two issues will be addressed by Fed officials at their next policy meeting. And, by waiting until September, they hope that investor apprehension will be countered by additional data releases confirming that the U.S. economy is approaching "escape velocity."

Such an outcome, were it to materialize, would also facilitate the next evolution of the forward guidance strategy (the other particularly complex component of the institution's highly experimental policy stance). As such, the Fed hopes to enhance the probability of an orderly and gradual reduction in the institution's experimental policies.

Also at stake is the current issue of who will replace Ben Bernanke as Federal Reserve Chairman.  Currently leading speculation is Bernanke's lieutenant Janet Yellen and former Clinton/Obama economic advisor Larry Summers.  Analysts think this will be addressed by the next meeting:

In September we may also have greater clarity on who will succeed Ben Bernanke at the helm of the world's most powerful central bank. Accordingly, rather than be mesmerized by the Summers-Yellen media circus, investors could have a better handle on policy continuity at the one economic institution that has stepped up to its policymaking responsibilities in the U.S.

All of this happens after the Commerce Department announced the country's GDP for the second quarter this year.  Beating analyst expectations, the GDP grew 1.7% in that quarter.  Still, this is no cause for celebration: The Commerce Department also revised the GDP rate for the first quarter this year downward to 1.1%, and the previous quarter had almost no growth at 0.1%.  Some analysts remain worried at the implications of all this:

It would be one thing if that kind of slow growth was happening in a time of full employment, when the economy was basically sound. But with 7.6 percent unemployment, the nation could really use a few quarters in a row of 4, 5 or 6 percent growth to get us back to where people can really be pleased with the economy.

[...]

But 1.7 percent growth isn’t good in the environment we’re in, even if it is a little better than economists thought the number would be. It isn’t even mediocre. It’s terrible. It’s a sign of the diminished economic expectations that economy-watchers have set for themselves that it’s anything to crow about at all.

Whether the situation improves remains to be seen.  What is certain is that, for most Americans, things remain middling in terms of their outlook.

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