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Debt Downgrade

Economy needs more than ‘cautious optimism’

Jeff Horwich Aug 9, 2011
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STEVE CHIOTAKIS: Investors are still reacting to Standard & Poor’s U.S. debt downgrade. And the world is turning its eyes to the economic players who can help avert another financial crisis. Such as central banks — like the Federal Reserve Bank of the United States. And it just so happens the Fed has a scheduled meeting this morning.

Marketplace’s Jeff Horwich explains.


JEFF HORWICH: The Fed’s open market committee last met in June. Things weren’t exactly swell, but chairman Ben Bernanke struck a classic, “cautiously optimistic” tone.

BEN BERNANKE: The economic recovery appears to be proceeding at a moderate pace, though somewhat more slowly than the committee had expected. We expect the unemployment rate to continue to decline.

This time it’ll take a lot more than cautious optimism to lift our spirits.

Karen Petrou of Federal Financial Analytics says the S&P downgrade has messed with our heads for three days now — the Fed needs to administer a big old dose of “it’s not so bad.”

KAREN PETROU: This was S&P shouting “fire” in a crowded theater, and the Fed has got to figure out a way to calm people down. That’s not its strong suit, it’s never been good at doing that before.

The Fed’s usual policy tools can’t do much with interest rates already near zero. One significant thing the Fed could do is a third round of quantitative easing where it buys bonds to pump money into the U.S. economy, but analysts say not to expect any major moves like that this afternoon.

I’m Jeff Horwich for Marketplace.

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