What will the Federal Reserve do Next?

July 13, 2012

What can Americans and investors expect from the Federal Reserve? An extension of operation twist and potential monetary action if the economic recovery does not pick up soon.

According to the minutes from the Federal Open Market Committee (FOMC) meeting, which consisted of the Federal Board of Governors and the presidents of the twelve district reserve banks, it will be a few yearsbefore the U.S. economy will see significant improvement. Economic projections from the Federal Reserve estimate that the growth rate of GDP will not exceed the growth rate of potential output until 2014.

The Federal Reserve agreed to extend its $400 billion “Operation Twist” program designed to shift the Fed’s balance sheet toward holding a higher proportion of Treasury securities with long-term yields by another $267 billion. This extension follows from their worry about different factors contributing to a slow economic recovery, including the heightened financial strains in Europe, credit conditions in the housing market, and uncertainty over the future actions of fiscal policy.

The meeting participants did discuss the problems associated with fiscal policy uncertainty. While debates in Congress center around what programs need to be cut and how to approach the sequester, the Fed meeting reported that “an agreement on a credible longer-term plan that put the federal budget on a sustainable path over the medium run in a way that removes the near-term fiscal risks to the recovery would help alleviate uncertainty, likely would have positive effects on consumer and business sentiment, and so could spur an increase in business investment and hiring.”

The majority of participants at the FOMC meeting deemed that the current level of uncertainty about GDP growth and unemployment “higher than was the norm during the previous 20 years.” This past week, the Bureau of Labor Statistics reported that the June unemployment rate was 8.2 percent, unchanged since April. Many Americans don’t know when the economy is going to pick up speed or how secure they are in their job. Is now really the appropriate time for Washington to add a growing national debt to that uncertainty?

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