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Tag: bond buying

  • U.S. GDP Increases 3.2% in 4th Quarter

    U.S. GDP Increases 3.2% in 4th Quarter

    Ever since the government shutdown occurred in October last year, economists and consumers alike have been worried about the future state of the United States economy. Thanks to the latest reports from the Commerce Department, however, those fears should be allayed.

    During the 4th quarter last year, the GDP of the US rose 3.2%. While this figure is down from the 3rd quarter, which reported a 4.1% increase, it is significantly higher than growth earlier in 2013. For the entirety of 2013, the GDP only grew 1.9%, down from 2012 in which the measured growth was 2.8%. The initial decline earlier in the year was most likely the result of increased taxes and a tightened budget for federal spending.

    Along with the government shutdown, many people were worried that the economy was being artificially inflated through the Federal Reserve’s bond-buying program. Fortunately, the GDP report from the Commerce Department shows that that was not necessarily the case.

    Consumers and businesses were what spurred the 4th quarter growth. Consumer spending increased 3.3% over the holidays, up from a 2% increase in the 3rd quarter. This 3.3% increase marks the largest increase in consumer spending in the last 3 years.

    Businesses invested much more money into equipment, increasing their spending 7% in this department, while also increasing their stock inventories in anticipation of continued increased sales. If sales do not keep up with their current rates, however, these massive inventories could slow GDP growth in the 1st quarter of this year.

    A surprising contributor to GDP growth was an increasing number of US exports, which grew 11.4% in the 4th quarter. Imports showed a very minimal increase, meaning the US is finally making headway in its trade deficit.

    The biggest deductions came from the government shutdown and the housing market. The government shutdown reduced federal expenditures by 12.6%, leading to a 0.3% reduction in the overall GDP. (Lessened overall government spending reduced the 4th quarter GDP a total of 0.9%.) At the same time, the residential housing market declined 0.3%, marking the first decline for housing in the GDP since 2010.

    The biggest worry still, though, is the lack of job creation. While official unemployment rates currently sit at 6.7%, the majority of the decline in unemployment claims has come from those who have completely dropped out of the job market. The last report for weekly unemployment claims showed a 19,000 claim increase, the highest number in a month.

    “Everybody agrees that with each progressive quarter and year, it is getting better. But without a meaningful increase in employment, it makes it difficult to power strong growth in the future,” stated Guy Berger, a US economist at RBS.

    Luckily, the new Chair of the Federal Reserve just happens to be an expert on unemployment. Let’s hope Janet Yellen can help the US GDP and employment rates continue their upward trends.

    Image via WhiteHouse.gov

  • Janet Yellen Confirmed as Next Federal Reserve Chair

    Yesterday, the Senate voted 56-26 to usher in Janet Yellen as the next Chair of the Federal Reserve.

    Yellen’s acceptance came as no surprise, especially seeing as she was easily approved by the Senate Banking Committee in November. Yellen is the first woman to ever head the Federal Reserve and is expected to continue the country on the path it has been traipsing since the beginning of the “Great Recession” 8 years ago.

    Yellen will officially take office on February 1, after Ben Bernanke’s term is officially over. Bernanke’s shoes will be hard to fill due to the unique situation the Federal Reserve finds itself in at the current moment. In order to abate an impending economic collapse, the Federal Reserve has been investing $85 billion per month in a bond-buying program. This program was intended to push money into the US economy, driving down interest rates on loans and spurring investment and spending from consumers.

    However, Bernanke’s bond-buying program has come under much fire from the GOP, where many politicians insist that continuing the program “risks fueling an economic bubble and even hyper-inflation,” potentially leading to “real and lasting damage to our economy.” Senator Rand Paul has perhaps been the Fed’s most outspoken opponent, recently stating that the policies of the Federal Reserve have destroyed “97 percent of the dollar, along with millions of jobs” since its inception.

    However, Yellen has already shown that she is willing to work with both sides of the political spectrum, recently voting to ease the quantitative easing program of the Federal Reserve from $85 billion per month to $75 billion, a move which presents dangers in itself: If Yellen eases the program too quickly, it could worry potential investors and lead to withdrawal from the markets and increased interest rates; if she moves too slowly, more “bubbles” could appear in the economy, leading to constant fear that said bubbles may burst: “There are dangers, frankly, on both sides of ending the program or ending accommodation too early. There are also dangers that we have to keep in mind with continuing the program too long or more generally keeping monetary policy accommodation in place too long,” Yellen told Senators during Congressional confirmation hearings in November.

    While most politicians are worried about the logistics of the Fed’s bond-buying program, Yellen will most likely spend her time worrying about how to decrease the unemployment rate. During all of her time as a student, a professor (at UC Berkeley, Harvard, and the London School of Economics), and a policymaker, Yellen’s primary focus has been on unemployment. Yellen has been termed “dovish” on monetary policy, meaning she is willing to let inflation rise if it brings about higher employment more rapidly.

    After her confirmation, President Obama championed Yellen as the next Chair of the Federal Reserve, stating, “The American people will have a fierce champion who understands that the ultimate goal of economic and financial policy making is to improve the lives, jobs and standard of living of American workers and their families.” Obama originally nominated Yellen following the withdrawal of his initial nominee, Larry Summers, and at the behest of economists across the world.

    Image via Wikimedia Commons

  • Stock Market Dips Drastically After Wednesday’s High

    On Wednesday, September 18, the Dow set an all-time high at closing, as did the S&P. The boom came shortly after the Federal Reserve announced that it would continue its economic stimulus program.

    However, the investment-high did not last long. The stock saw itself losing all of its gains from Wednesday on Thursday and Friday. Economic pundits believe the dip in the market is due to uncertainty surrounding the actual strength of the market: “Investors need to take a step back and consider the idea that maybe the U.S economy is on weaker footing than we originally thought,” stated Marc Doss, regional CIO for Wells Fargo.

    Investors were surprised when Ben Bernanke announced that the Fed would continue its $85 billion bond-buying program. All signs pointed to the program being decommissioned this September. However, the Federal Reserve stated that it “decided to await more evidence that progress will be sustained” before ending the program.

    The purpose of the Fed’s bond-buyig program is to pump money into the economy to encourage people and banks to borrow and lend more money. Thus, it is a program that would need to be implemented when the market is not at its strongest. Because of its continuance, investors are wary as to current market strength, hence the drop in the stock market after the announcement.

    Companies themselves, however, seem to have much faith in the market. There have been 140 IPO’s added to the market this year, 46% more than 2012. More companies are offering IPO’s because they see promise and stability in the market. While this is generally seen as a positive sign, it does offer more risks to companies and could create a bubble situation of its own – the influx of IPO’s may start a trend which could diminish the quality of offerings and lessen peoples’ investments in said companies.

    The main concern with the Fed’s bond-buying program right now concerns the time-table as to when the Fed will feel ready to end the program:

    “Fed officials have never been able to agree among themselves what exactly would constitute the ‘substantial’ improvement in the labor market outlook that would persuade them to halt the monthly asset purchases. As a result, they have done a very poor job of communicating to the markets how improvements in the labor market should be gauged,” stated Paul Ashworth, chief US economist at Capital Economics.

    There is also the concern that the market growth the US has seen in September is the result of quantitative easing rather than actual company growth. If this is the case, many investors, such as Doug Kass of Seabreeze Partners Management, believe that the Fed has gotten itself in a situation that it can’t escape: “There is no way out for the Fed once it started the process of printing. Getting in was easy. Getting out—not so much. The Fed is trapped and can’t end tapering or else the bond and stock markets will blow up. The longer this continues the bigger the inevitable burst.”

    Then there are the other factors such as potential conflicts in the Middle East, worries over government shutdown, and the question of who will become the next chair of the Federal Reserve. In essence, nothing has changed – no one does not understand economics, and no one ever will.

    Image via Wikimedia Commons