Belmont Club

Let's Twist Again Like We Did Last Summer

The Chairman of the Federal Reserve announced that it would attempt to further stimulate the economy to create growth. The Daily Telegraph reported Fed Chairman Ben Bernanke as saying:

“We’ve taken a step today which is a substantive step which will provide additional accommodation for the economy.

Moreover, we have stated that that we are prepared to take further steps if necessary to promote sustainable growth and recovery in the labour market.

So, we are prepared to do what is necessary. We are prepared to provide support for the economy.”

The central bank expanded its ‘Operation Twist’ by $267 billion, meaning it will sell short-term securities and buy long-term ones in an effort to keep borrowing costs down.

The programme, which was due to expire this month, will now run through the end of the year.

At the G20 summit, President Obama had earlier expressed concern that a European downturn could affect his re-election chances.

Mindful of his audience of voters in the U.S., Obama said, “The best thing the United States can do is to create jobs and growth in the short term even as we continue to put our fiscal house in order over the long term.”

Obama urged Congress to focus on steps it could take to boost job creation and economic growth, pitching legislation he proposed months ago that has little chance of garnering Republican support in an election year.

Niall Ferguson assessed the effects the crisis would have on Obama in an article in the Daily Beast.

Could Europe cost Barack Obama the presidency? At first sight, that seems like a crazy question. Isn’t November’s election supposed to be decided in key swing states like Florida and Ohio, not foreign countries like Greece and Spain? And don’t left-leaning Europeans love Obama and loathe Republicans?

Sure. But the possibility is now very real that a double-dip recession in Europe could kill off hopes of a sustained recovery in the United States. As the president showed in his anxious press conference last Friday, he well understands the danger emanating from across the pond. Slower growth and higher unemployment can only hurt his chances in an already very tight race with Mitt Romney.

So, do the steps announced by Bernanake materially improve the President’s chances of re-election by easing the economic crisis? That depends on how the market reacts. The Daily Telegraph notes that

The Fed, having announced the extension of Operation Twist, has now slashed its economic growth estimate for this year by a half point. GDP is now expected to grow by a maximum of 2.4pc by the end of the year, and the jobless rate will rise to as high as 8.2pc.

So in reality the stimulus announced by Bernanke is intended to arrest an expected fall in the economy. It is not therefore the case the Operation Twist will cut joblessness. More likely it is intended to prevent joblessness from rising even further.

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