Interest Rates Will Be Closely Watched Wednesday

Apr 27, 2011, 05:49 by David Hope

Interest rates will be closely watched on Wednesday as many economist are asking one simple question: What is the next step for U.S. monetary decision-makers?

What's next after QE2, The Wall Street Journal asks in a headline. The New York Times asked the same thing in an article published Sunday.

QE2 refers to the $600 billion quantitative easing program initiated by the U.S. Federal Reserve in November.

For the Fed, this was admittedly an apologetic program, which is the sentiment that underlies what is termed as an unconventional approach. In discussion, in other words, QE2 -- it was the second time this approach was tried since the downturn hit -- frequently sits next to an explanation that there is no more room for the Fed to lower interest rates, which are now at zero to 0.25 percent.

With interest rates on the floor and with Washington's penchant for stimulus spending completely evaporated, the Fed decided to purchase Treasury bonds, which kept borrowing rates for corporations low and apparently kept prices from sinking into a deflationary trend. In the main, however, corporations are sitting on enormous piles of cash, lending has barely increased since the program began and prices have tracked higher in recent months. In addition, the huge majority of new jobs created in the last year have come from the smallest businesses, not corporations, which remain wary of making a move.

Point blank, some will say, QE2 did not influence the U.S. economy enough to make a difference but instead supplied a flood of new money into emerging economies, such as China and Brazil, which complained loudest when the program began. Secondly, there is nothing quite so thankless as an intervention that forces prices higher when nearly 15 million people are out of work. On one hand, it is easy to sympathize with Joe Consumer when prices go up but salaries do not. But businesses left out of the recovery so far -- home builders, for example -- feel squeezed out of the picture or simply overlooked.

No question these are frustrating times all around and no question an increasing number of Fed policymakers are speaking up about their dissatisfaction. Chairman Ben Bernanke is moving toward a more transparent, open system and former Fed Chairman Alan Greenspan has said it is patently absurd to pretend the entire board of directors at the Fed speaks with a unified voice. Nevertheless, investors now have more second-guessing to do. The Fed's transparency will require a mature response from the public, especially investors looking for solid clues. The Fed, it could be said, is now out of solid clues. That's reasonably realistic, but it makes life a bit more confusing for some.

In international markets Monday, the Shanghai composite index in China fell 1.51 percent and the Hang Seng index in Hong Kong rose 1.01 percent. The Sensex index in India was flat, dropping 0.09 percent and the S&P;/ASX 200 index in Australia gained 1.13 percent.

In midday trading in Europe, the FTSE 100 index in Britain fell 0.07 percent while the DAX 30 in Germany rose 0.64 percent. The CAC 40 in France added 0.43 percent and the Stoxx Europe 600 rose 0.51 percent.

Source: UPI