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Fed expected to cut US rates to 0.5%• Depression-era measures considered for economy
• Toyota to mothball Mississippi plant
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Kathryn Hopkins and Larry Elliott The Guardian, Tuesday 16 December 2008 Article historyThe Federal Reserve is tonight expected to step up its battle to revive the recession-hit US economy when it cuts interest rates to a record low of 0.5% and announces measures first tried in the Great Depression to bring down borrowing costs for companies and home owners.
The American central bank began a two-day meeting yesterday as it announced data that showed another sharp plunge in industrial output last month. Wall Street believes the recent calamitous economic news guarantees the 10th cut in the Fed funds rate since the credit crunch began in August 2007.
Analysts also expect measures to bring down the longer term cost of borrowing. This process, known as quantitative easing, involves the central bank buying up long-dated treasury bonds in order to reduce supply and eventually bring down long term interest rates.
<span style="font-size: 14pt"> Graham Turner, of consultants GFC Economics, said: "It is no exaggeration to say that this week's Fed meeting is the most important since April 1932."</span>
The central bank, chaired by Ben Bernanke, has already slashed rates by 4.25 percentage points over the last 14 months to leave them at 1%.
The Fed said yesterday that US industrial production dropped 0.6% in November, with manufacturing down 1.4%. This was slightly less than expected, but still prompted several economists to predict that industrial production would drop by about 10% in 2008.
In an example of US industrial woes, Toyota said yesterday that it was delaying the start of production at its plant in Blue Springs, Mississippi, indefinitely as the Japanese carmaker coped with the downturn in the auto industry. The plant was scheduled to begin production in 2010 and make the Prius hybrid.
Mike Goss, a spokesman for Toyota's US arm, said that the plant's construction is about 90% complete and Toyota will finish the building. However, he said, the installation of the machinery, "the most time-consuming" element of construction, is delayed indefinitely.
The US economy is flagging in the midst of the credit crunch. Consumer spending has plunged and last week's claims data suggests that November's drop in payrolls may be eclipsed by even bigger losses in the coming months. The fall in mortgage rates may have boosted demand but is unlikely to stop delinquency rates and foreclosures from rising again.
"So much more needs to be done, particularly with corporate borrowing costs continuing to ratchet higher. The spectre of a General Motors default is hardly helping. Higher corporate bond yields mean more layoffs, more foreclosures and bigger house price declines," added Turner.
The Fed will also discuss a number of unconventional measures today that could be employed in a desperate attempt to lift the economy out of recession. Analysts believe the Fed could introduce quantitative easing, which means adding more money to the system to avert deflation. This could also involve buying up asset-backed securities, commercial paper and long-term corporate debt.
"From here on out, monetary policy has to rely primarily on non-traditional tools, tools other than the funds rate, to try to stimulate the economy," said former Fed governor Lyle Gramley.
Turner believes that the Fed must announce "true" quantitative easing, namely an explicit policy to buy longer dated treasuries. "If it does not and merely cuts the Fed funds rate to 0.5%, the bear market rally in equities will dissipate by early next year. And 2009 will be more difficult than even 2008. It is time for the Fed to deliver," he said.
Japan is also struggling. Confidence among Japanese businesses fell at its fastest rate for more than three decades in the last quarter, data out yesterday showed. The Bank of Japan said that the confidence index among major manufacturers plunged from -3 to -24 in the three months to December. This was the biggest fall since February 1975.
Explainer: Quantitative easing
Quantitative easing, which was used by Japan to try to float the economy out of its deflationary period, involves flooding the economy with money. This can be done by printing more notes, but this can lead to rampant inflation. The Fed is looking at putting more money back into the economy by buying up treasury bonds, particularly long-dated ones. This will increase bond prices and depress yields, leading eventually to a fall in long-term interest rates. These are used to price most longer term borrowing such as commercial loans and mortgages. It also injects funds into the banking system by buying bonds from the banks.
• Toyota to mothball Mississippi plant
Buzz up!
Digg it
Kathryn Hopkins and Larry Elliott The Guardian, Tuesday 16 December 2008 Article historyThe Federal Reserve is tonight expected to step up its battle to revive the recession-hit US economy when it cuts interest rates to a record low of 0.5% and announces measures first tried in the Great Depression to bring down borrowing costs for companies and home owners.
The American central bank began a two-day meeting yesterday as it announced data that showed another sharp plunge in industrial output last month. Wall Street believes the recent calamitous economic news guarantees the 10th cut in the Fed funds rate since the credit crunch began in August 2007.
Analysts also expect measures to bring down the longer term cost of borrowing. This process, known as quantitative easing, involves the central bank buying up long-dated treasury bonds in order to reduce supply and eventually bring down long term interest rates.
<span style="font-size: 14pt"> Graham Turner, of consultants GFC Economics, said: "It is no exaggeration to say that this week's Fed meeting is the most important since April 1932."</span>
The central bank, chaired by Ben Bernanke, has already slashed rates by 4.25 percentage points over the last 14 months to leave them at 1%.
The Fed said yesterday that US industrial production dropped 0.6% in November, with manufacturing down 1.4%. This was slightly less than expected, but still prompted several economists to predict that industrial production would drop by about 10% in 2008.
In an example of US industrial woes, Toyota said yesterday that it was delaying the start of production at its plant in Blue Springs, Mississippi, indefinitely as the Japanese carmaker coped with the downturn in the auto industry. The plant was scheduled to begin production in 2010 and make the Prius hybrid.
Mike Goss, a spokesman for Toyota's US arm, said that the plant's construction is about 90% complete and Toyota will finish the building. However, he said, the installation of the machinery, "the most time-consuming" element of construction, is delayed indefinitely.
The US economy is flagging in the midst of the credit crunch. Consumer spending has plunged and last week's claims data suggests that November's drop in payrolls may be eclipsed by even bigger losses in the coming months. The fall in mortgage rates may have boosted demand but is unlikely to stop delinquency rates and foreclosures from rising again.
"So much more needs to be done, particularly with corporate borrowing costs continuing to ratchet higher. The spectre of a General Motors default is hardly helping. Higher corporate bond yields mean more layoffs, more foreclosures and bigger house price declines," added Turner.
The Fed will also discuss a number of unconventional measures today that could be employed in a desperate attempt to lift the economy out of recession. Analysts believe the Fed could introduce quantitative easing, which means adding more money to the system to avert deflation. This could also involve buying up asset-backed securities, commercial paper and long-term corporate debt.
"From here on out, monetary policy has to rely primarily on non-traditional tools, tools other than the funds rate, to try to stimulate the economy," said former Fed governor Lyle Gramley.
Turner believes that the Fed must announce "true" quantitative easing, namely an explicit policy to buy longer dated treasuries. "If it does not and merely cuts the Fed funds rate to 0.5%, the bear market rally in equities will dissipate by early next year. And 2009 will be more difficult than even 2008. It is time for the Fed to deliver," he said.
Japan is also struggling. Confidence among Japanese businesses fell at its fastest rate for more than three decades in the last quarter, data out yesterday showed. The Bank of Japan said that the confidence index among major manufacturers plunged from -3 to -24 in the three months to December. This was the biggest fall since February 1975.
Explainer: Quantitative easing
Quantitative easing, which was used by Japan to try to float the economy out of its deflationary period, involves flooding the economy with money. This can be done by printing more notes, but this can lead to rampant inflation. The Fed is looking at putting more money back into the economy by buying up treasury bonds, particularly long-dated ones. This will increase bond prices and depress yields, leading eventually to a fall in long-term interest rates. These are used to price most longer term borrowing such as commercial loans and mortgages. It also injects funds into the banking system by buying bonds from the banks.
<div class="ubbcode-block"><div class="ubbcode-header">Originally Posted By: RichD</div><div class="ubbcode-body">why did you dig this one up? </div></div>
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