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Bernanke to Hold Interest Rates Low

Michael Bowman

August 10, 2011

The U.S. central bank says America’s economic recovery has slowed, and that near-zero interest rates are expected to remain in place for another year. The statement from Federal Reserve policymakers came after a U.S. credit rating downgrade and significant losses on global financial markets.

If nervous investors were looking for swift, aggressive action from the Federal Reserve in response to the U.S. credit rating downgrade, lagging economic growth, and upheaval in financial markets, Tuesday’s meeting of Fed policymakers gave them little to cheer about.

With interest rates already at historic lows, the U.S. central bank announced no interest rate or policy changes, nor any new rounds of monetary infusions. That, despite noting what the Fed termed heightened “downside” risks to an economic recovery that many economists believe is stalling.

Even so, the Federal Reserve did not rule out future action, saying its Open Market Committee discussed a “range of policy tools available to promote a stronger economic recovery.”

Bank of New York Mellon global financial strategist Jack Malvey said, “I think they [Federal Reserve officials] would prefer to see the markets try and reach equilibrium on their own," said Malvey. "This [market upheaval] really is not [a repeat of the financial crisis of] 2008. This is a response to an overload of negative factors over the course of the last couple of weeks. And it does provide some basis for optimism and not-too-distant [market] stabilization.”

Malvey appeared on Bloomberg Television. He said market fears of another recession in the United States have eclipsed those stemming from Standard & Poor’s downgrade of U.S. creditworthiness. “The chances of a recession in the U.S. are probably up in the 50-percent category [range]. In many respects, the [S&P] downgrade was no big deal. It was in recognition of what was fairly obvious over the last year, that the U.S. fiscal position is not as strong as it had been," he said.

A slowing U.S. economy will exacerbate America’s fiscal imbalances. Yet a $1.5 trillion deficit gives the federal government little room to stimulate growth. Given these realities, the Obama administration is advocating short-term measures to spur job growth and consumer activity while also urging long-term efforts to cut the deficit and slow the growth of the national debt.

Gene Sperling, who heads President Barack Obama’s National Economic Council, also appeared on Bloomberg Television. “We need to do both the short-term and the long-term. And the best thing we can have is that we are willing to take aggressive bipartisan action on job growth in the short-term, in the same context in which we are also signaling that we are going to get control of our long-term fiscal situation," he said.

Sperling said the administration wants to see an extension of a temporary cut in taxes paid by workers to fund Social Security, thereby giving wage earners higher take-home pay. Monday, President Obama renewed his call for a bipartisan formula to reduce America’s debt burden. Washington’s lack of progress in confronting America’s fiscal challenges was listed as a primary factor in Standard & Poor’s decision to cut the U.S. credit rating last week.

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