Thursday, December 22, 2011

So what is going on for 2012 and the U.S. Fed?


Fitch Ratings said it expects U.S. federal debt held by the public to exceed 90% of gross domestic product by the end of the decade, as the government struggles to agree on timely fiscal measures to reduce the budget deficit.


(Kitco News) – The U.S. Federal Reserve has pulled out all the stops in recent years, leaving the U.S. with a near zero interest rate policy since December 2008. With U.S. economic growth remaining lackluster, the debate rages on whether the Fed will embark upon another round of bond-buying in 2012, widely known as quantitative easing.
Current market rumors include expectations for a QE3 package of about $500 billion mortgage-backed securities.
The official monetary policy rate, or federal funds rate remains at zero to 0.25 basis points and the Federal Open Market Committee has suggested rates will remain at that level through mid-2013.
Traditionally, during recessionary periods, the Fed lowers rates, which encourages consumer borrowing and the increased levels of spending help drive the economy to stronger growth levels. That pattern isn’t working this time.
BETTER GROWTH AHEAD?
Recent U.S. economic data, however, has been surprising on the upside, leaving most economists to forecast a modest acceleration in GDP growth for 2012, and that has implications both for Fed policy and the direction of Treasury market yields.
Chris Rupkey, chief financial economist at the Bank of Toyko-Mitsubishi is calling for 2012 GDP growth at 3.2%.
“The economy may actually be lifting quicker than people expected. The weekly jobless claims number is a leading indicator, growth could be stronger than people expect,” he said. In mid-December, the weekly jobless claims data dropped to a 3 1/2 year low, holding well below the critical 400,000 threshold for several weeks.

Addressing potential risks of another QE package, Stiles said “it tends to create imbalances. To buy $500 billion in mortgages, printing more money on top of all the money they’ve already printed—it does tend to boost commodity prices every time they print money. That ends up hurting the middle and lower class Americans.

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