It’s been nine months since the Federal Reserve started a $600 billion plan to stimulate the economy by buying government bonds. The original intent of the move was to stimulate lending, which has been slow since December 2007 when the financial recession started in the United States.
According to the Time article, "Will the Fed's $600 billion plan be big enough to revive the economy" (Nov. 3, 2010), the Federal Reserve had announced at the time that this move was also an attempt to help lower unemployment - the idea being that if companies had more cash in its pockets and felt that business loans wouldn’t be a problem, they would use that money to hire more people.
Did the Central Bank's Treasury-Buying Plan Work?
Back in 2010, Federal Reserve Chairman Ben S. Bernanke acknowledged that the economy was growing at a pace that was “less vigorous than we would like” during a press conference. At the time he said, “Given the committee’s objectives, there would appear - all else being equal - to be a case for further action.”
The immediate effect of the Bernanke Treasury-buying program was substantial: the market saw a 20 percent rally that lasted until the end of the 2010. However, there has been no correlation to the program and to either a recovery in unemployment numbers or the housing crisis. Even more discouraging, even the stock market rally that was seen directly after the announcement has stalled out. Treasury yields hit almost record lows and August 2011 was part of the weakest six months of the anticipated recovery. Unemployment in the first week of September remained at just over 9 percent - one of the highest unemployment numbers so far this year. Additionally, the number of people applying for jobless benefits rose unexpectedly in the last week of August.
What Can Bernanke Do to Stimulate the Economy?
Bernanke repeated his disappointment in the economy’s growth over the last six months at a conference in August. He didn’t mention the 2010 plan to buy treasury bonds. Instead, Bloomberg reported in the article "Treasury Yields at Almost Record Lows as Fed's Bernanke Eschews Action" (Aug. 27, 2011) he indicated that the county’s central bank had the tools to stimulate the economy but was coy when it came to revealing particulars like when or even if those tools would be used.
One move that the Fed has already committed to is keeping interest rates at all-time lows. The promise extends to 2013. One direct result of the low interest rates is the yields on 2-year and 10-year Treasury notes have fallen to all-time lows.
The Problems the Fed Can't Fix
However, despite the tools at the central bank's disposal, financial editor Jill Schelesinger wrote in August 2011 that Ben Bernanke and the Fed can't fix the economy. Of note is the three biggest problems the economy has right now:
- Consumers are still paying off debt that they accumulated over the past decade instead of purchasing new things.
- The government is not spending money due to political pressures and the debt crisis.
- Corporations, which are making record profits due to employee reduction and other austerity measures, are keeping their money instead of hiring more people or giving raises.
All in all, there may not be much that Bernanke or the Federal Reserve can do to "fix" the economy. The ills that ail the United States are bigger than the banking systems and the effects of the recession may be felt for several more years.
Heidi DeVries - Heidi DeVries was a resume screener for a communications firm and shares tips to secure an interview and be a successful job applicant.
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