Economists underwhelmed by Fed's new plan

Traders in the Chicago Board Options Exchange (CBOE) S&P 500 stock index options pit wait for a statement from the Federal Reserve following the FOMC meeting -- August 10, 2010.

TEXT OF INTERVIEW

Bill Radke: Federal Reserve officials met yesterday and decided the U.S. economy needs a little more help from them -- not a lot, just a little. In its typically understated way, the Fed warned the recovery seems to be slowing. Companies aren't hiring, banks aren't lending. Marketplace's Jeff Horwich joins me live to break down why the central bank's moves are being watched so closely. Good morning, Jeff.

Jeff Horwich: Good morning, Bill.

Radke: What else is Federal Reserve going to do to help the economy?

Horwich: Well during the financial crisis, the Fed stepped in and bought a bunch of mortgage-backed securities that nobody else seemed to want. Well, those are actually coming due, and rather than just sock those proceeds away, the Fed is going to use some of it to buy up U.S. Treasury bonds for banks. The idea is this injects the Fed's cash into those banks and the financial markets, more broadly, and keeps interest rates low -- which should encourage more lending.

Radke: I note your emphasis on "should". How big a shot in the arm is this going to be?

Horwich: Well in general, economists seem to be kind of underwhelmed. The Fed will only have somewhere between $10 [billion] and $30 billion a month to spend this way -- not much in a $14 trillion economy. And the Fed's own interest rate is already near zero. This will keep it there, but that's not really providing any big new incentive for the banks to lend more.

Radke: And so what if this doesn't work, Jeff? What's next?

Horwich: I think the most important aspect of this Fed action, it seems, may be symbolic, saying: Look, we recognize thinks aren't going so well, and we're working on it. And what's next could be a return to what the Fed was doing at the height of the crisis -- basically printing money electronically to inject much larger amounts of cash into the country's financial system.

Radke: OK, Marketplace's Jeff Horwich. Jeff, thanks.

Horwich: You're welcome.

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