Thursday, January 31, 2013

Can QE Ignite Prospects For Growth?

By Grant de Graf

Federal Reserve Chairman Ben S. Bernanke has signaled that he will not ease up on the $85 billion in monthly bond purchases, aimed to spur a stalled economy and bring down 7.8 percent unemployment.

The Federal Open Market Committee said in a statement yesterday that growth, while slowed by “transitory factors,” faces “downside risks” even after strains in global financial markets have eased. The expansion will pick up and unemployment will fall in response to “appropriate policy accommodation,” Fed officials said in a statement after a two-day meeting.

The Feds decision to continue with its program of QE is appropriate, given the constrained prospects of growth and the low levels of inflation which prevail. This will help create the appropriate economic climate to improve investor confidence and allow business to expand more rapidly.

However, monetary policy on it own, will not provide the U.S. economy with a solution that will fast track the economy. To achieve this, the country needs a program, which will result in the investment of billions of dollars in an initiative, of which the nation can be part. Additionally, government investment (not expenditure) in the infrastructure, should be tendered out to the private sector, thus providing business with  the opportunity to participate in economic expansion.

The Second World War provided the U.S. economy with a catalyst to exit the Great Depression. The allocation of funds in infrastructure facilitated a spin-off effect, which benefited business as a whole.

It is folly to suggest that in today's economic environment, increased spending in military can improve the economy. During the Second World War, the manufacturing sector was underdeveloped and the allocation of public funds to private sector initiatives, helped develop industry and secure a term of protracted growth. Today the manufacturing sector is at a very different stage, than it was 70 years ago.

However, a program which will benefit the nation and provide fiscal stimulus is still required. Investment funding needs to be distinguished from expenditure funding, in view of the constraints that exist with the pending fiscal cliff.

Monetary policy on its own, cannot be expected to expedite growth in the U.S., without a national investment program that will catapult the U.S. economy to recovery.

Jan. 30 (Bloomberg) -- Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., talks about the Federal Reserve's decision today to keep purchasing securities at the rate of $85 billion a month, and the outlook for Fed policy and the U.S. economy. Feroli speaks with Adam Johnson and Alix Steel on Bloomberg Television's "Street Smart." (Source: Bloomberg)

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