Central Bank Collaboration
The global economy came to a stall earlier this summer with China slowing and the European debt crisis worsening, many investors and business owners were expecting the worst. The Federal Reserve has already promised to keep short-term interest rates at zero until 2014 and flattened the yield curve through Operation Twist. If that can’t spark any economic growth, then what is there left to do?
Thursday, the Federal Reserve addressed those concerns by announcing that they will buy $40 billion worth of mortgage-backed securities each month and extend its zero short-term rate policy till at least mid-2015. If this wasn’t enough, they also left their mortgage-backed securities program open ended until the job market improves. This was seen as a powerful step towards improving economic growth while keeping in mind the Fed’s dual mandate. Investors certainly agreed with the Fed chairman sending the broader stock market higher by 1.5%.
Not everybody was supportive of the FOMC’s diction. Mitt Romney indicated that he would not appoint Ben Bernanke after his term ends in 2014. Many critics argue that this was a political act to improve the economy before the November election. When asked, Ben Bernanke indicated that the FOMC is trying to be apolitical and do what is best for the economy.
The Fed’s decision to act came only a week after the European Central Bank announced that it will continue to buy the debt of troubled countries and do whatever it takes to preserve the Euro. The collaboration of the world’s two biggest central banks should give businesses the confidence to invest, but the true impact of the global easing plan won’t be seen for a while.