The slowdown in US growth has raised speculation the US Federal Reserve may have to provide additional monetary support to the economy, and the Fed Chairman say they are monitoring the issues and standing by.

With interest rates already effectively Zero and the Fed’s balance sheet at a record US$2.85-T, US central bank officials has not acted yet to stimulate economic activity further yet.

Persistent unemployment and new turbulence in financial markets has added pressure on the Fed to do something.

US Fed Chairman Ben Bernanke noted last week that the Fed is prepared to respond to possible further weakness.

Here are some of the measures he said that are still available to the Fed, as follows;

1. Bolster easy policy assurances

The Fed has promised to hold benchmark interest rates very low for an extended period. It could bolster that commitment by extending the pledge to the securities holdings acquired through unconventional monetary policy. Or it could pledge to hold rates near Zero until a specific date beyond the timeframe currently expected by the markets.

2. Bond Buys

New purchases of long-term Treasury assets is seen as a possibility. The Fed believes its 2 rounds of bond-buying have held longer-term rates down and encouraged investors to move into riskier assets, helping drive the stock market higher. The Fed could also increase the average maturity of its securities holdings to put further downward pressure on long-term borrowing costs.

3. Lower the interest rate on excess bank reserves

The Fed could lower the 0.25% interest rate it currently pays banks on excess reserves held at the Fed. Doing so could encourage banks to put those reserves to use by lending them out. But Mr. Bernanke has said the likely impact of moving this already low rate even lower would be marginal.

4. Raise the Fed’s inflation target

By temporarily setting a target for inflation above what the Fed now considers consistent with long-term price stability, the Fed would again be communicating to markets that any tightening of monetary policy is a long way off. But, Mr. Bernanke has made it clear this is a controversial proposition within the Fed and is an unlikely course of action. He did not mention this possibility in his most recent remarks on possible easing tools.

Stay tuned…

Paul A. Ebeling, Jnr.

 

 

 

 

Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster’s Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world