04 November 2010
This is the VOA Special English Economics Report.
The Federal Reserve calls America’s economic recovery "disappointingly slow." So the Federal Reserve decided Wednesday to add six hundred billion dollars to the financial system by the middle of next year. To do this, the central bank will buy Treasury securities from dealers.
The action is known as quantitative easing. The goal is to reduce long-term interest rates. The hope is to create conditions where businesses will invest more and people will spend more.
Buying longer-term Treasury securities will make less government debt available to investors. This will raise the price. As bond prices rise, their rates fall.
Long-term securities affect rates on home mortgages and other loans. Lower rates on corporate bonds could lead businesses to invest in more equipment and jobs.
Lowering short-term interest rates is the Federal Reserve's main way to get banks to increase lending. But those rates are already near zero.
The Fed earlier bought one trillion seven hundred fifty billion dollars of Treasuries and other securities. That program ended in March.
Fed Chairman Ben Bernanke, writing in The Washington Post, said "Easier financial conditions will promote economic growth." But interest rates are already low. And critics say further cuts are unlikely to create much growth.
Inflation also is low -- so low that some economists worry more about the risk of falling prices and wages. But others say pumping more money into the economy will weaken the value of the dollar. They say it could raise inflation to dangerous levels -- and not just in America.
Interest rates in the United States and Europe are lower than in Asia and Latin America. As a result, Asian and Latin American economies are already struggling with an overflow of investments.
Large flows of capital can raise currency values and make export-based economies less competitive. Several nations are considering limits on capital.
The Fed’s action this week had been expected. But it comes as the heads of twenty leading economies prepare for talks in South Korea next week. And it came a day after the Republican Party retook control of the House of Representatives from the Democrats.
President Obama has invited leaders of both parties to meet on November eighteenth. One immediate issue: what to do with tax cuts that are set to end next month.
And that's the VOA Special English Economics Report. I'm Steve Ember.
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Contributing: Heda Bayron, Jim Randle and Avi Arditti