U.S. Economy Increases Federal Reserve’s Difficulty in Making Decisions

Along with the upcoming expiration of the Federal Reserve System's (FRS) QE2 (Quantitative Easing 2) policies to stimulate the economy in June, the U.S. economy has recently been obviously diminishing, a situation that has suddenly increased the difficulty for FRS to make decisions.

After the economic crisis, the FRS triggered mobility in the finance market via maintaining a close-to-zero interest rate, extending the usage of money and purchasing national debt and other financial products on a large scale. FRS hoped that its support of debts and stimulation of expense, which can increase rate of employment and consumption, would have led the U.S. economy on the road to positive recovery. However, the current situation is not very satisfying.

Firstly, the arch-criminal of the economic crisis — the real estate market — has not improved but is facing “The Double Dip.” According to a report published by Standard & Poor’s on May 31, the first quarter housing price index continued to decline and even broke the lowest point since the economic crisis. The existing home sales index predicting the following months’ house sales decreased significantly as well, which further showed that the U.S. real estate market, after the expiration of the house purchase tax reduction policy, faces a dilemma.

Secondly, the manufacturing industry, which once heralded economic resuscitation, is decelerating. On May 31, the Institute of Supply Management published the Purchasing Managers Index for the month, which declined from 67.6 to 56.6. Such a decrease had been the biggest monthly reduction in the recent two years.

Besides, influenced by the increase of gasoline prices and high unemployment rates, U.S. consumers still have pessimistic views toward the economy. This means that Americans will be frugal with consumption in the future and so debilitate the intensity of economic resuscitation.

On May 26, the U.S. Department of Commerce promulgated the official statistics showing that the growth rate of the first quarter economic extension is 1.8 percent, which is half of the predicted figure and is appreciably lower than the growth rate of last year’s fourth quarter, 3.1 percent. Simultaneously, various institutes and investment banking firms, including Goldman Sachs, have recently lowered the predicted figures of U.S. economic growth.

In this situation, as the pilot of the U.S. economy, the FRS has again become the focus. The biggest challenge for FRS officers now is to decide whether to continue the stimulation policies at the risk of inflation, or to follow the original plan of gradually exiting the market to let the market recover on its own.

Many economists believe that unless the economy is bogged down more severely, there will be little possibility of the FRS putting forward new stimulation policies. Instead, the FRS may temporarily postpone the plan to sell properties or maintain the current interest rate for a longer time to enable the fragile economy to gasp.

However, if the end of FRS’s QE2 exacerbates the current employment situation, will the FRS be coerced to act by political pressure? After all, to the U.S. government, the current pressure of expanding employment is more intense than the pressure of inflation. Therefore, quite a few people have turned their eyes to the upcoming published employment statistics this week. If the job market still cannot bring comfort to people, the discussion of FRS’s new easing policies will once again be vehement.