As reported by the U.S. Federal Reserve’s leadership this week, it is expected that the situation in the labor market will improve a bit faster than expected. Central finance institution will continue to stimulate the growth of the U.S. economy, including the program under which each month it buys securities in the amount of 85 billion U.S. dollars.
The last three days the members of the Board of Directors of the Federal Reserve have met in Washington, discussing economic issues and next steps.
Fed Chairman Ben Bernanke evaluated the prospects of world’s largest economy more positively than in recent months.
In its report, the Fed said that by the end of this year, the U.S. unemployment rate could fall to 7.2% and to 6.5% in 2014.
This figure - 6.5% - has a great importance, as Fed officials have announced that they will continue to stimulate the economy, at least as long as the unemployment rate not decrease by more than 1 percentage point, up to the mentioned mark.
“If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year,” Bernanke said.
Other economists think that markets will have to deal with a withdrawal of Fed’s support.
“The vast, highly unprecedented, highly accommodative monetary policy stance that’s been so supportive of the recovery has begun to turn,” said Michael Gapen, senior U.S. economist for Barclays Plc in New York and a former economist in the Fed’s Division of Monetary Affairs. “The markets for the next several years or more will have to deal with the withdrawal of that support.”
In 2008, the Federal Reserve lowered short-term interest rates to a record low in an attempt to stimulate economic growth. When it became clear that it did not bring the desired results, the Federal Reserve began a comprehensive program to reduce long-term interest rates, providing the acquisition of a huge amount of financial assets.
The main element of the Fed’s stimulus program is lowering interest rates, thanks to which it’s cheaper for companies to finance new production facilities. According to Federal Reserve, this program is also good for the expansion of production capacity and hiring new workers.
However, if the stimulus program for the national economy has gone on too long, it can go too far and cause inflation.
Graphics: US economic growth data and Federal Reserve assets