The Economic Outlook and Monetary and Fiscal Policy

by Fed Chairman Ben Benanke on 3-February-2011

$600 Billion more of long term Treasury purchases are planned by Fed by Mid-2011. The Fed already bought $1,700 Billion. Stock market increases since August DJIA 10,000 now 12,000 are, in part, caused by such Fed Treasury purchases. Commodity and oil price increases are related also.

When Fed Treasury purchases stop, the Hope is that the Economy will be growing well, that the Economy will not be too negatively affected when the Fed sells the $2,300 Billion of Treasuries.

Separately, the Fed Chairman addressed the CBO projections of the National Debt and yearly Deficit. "The federal budget deficit has expanded to an average of more than 9 percent of gross domestic product over the past two years, up from an average of about 2 percent of GDP during the three years prior to the recession."

"the Congressional Budget Office CBO projects the deficit to fall from around 9 percent of GDP currently to roughly 5 percent of GDP by 2015, but then to rise to about 6-1/2 percent of GDP by the end of the decade.2 After that, it projects the budget outlook to deteriorate even more rapidly, with federal debt held by the public reaching almost 90 percent of GDP by 2020 and 150 percent of GDP by 2030, up from about 60 percent at the end of fiscal year 2010."

Congress and the President will need to change the future budgets to narrow a gap of about 3% of GDP down to 0%. The Fed Chairman discusses the Structural challenges ahead including a doubling of Medicare, Medicaid and Baby Boom retirement. Now there are about 5 people working for each person over 65. "By 2030, when most of the baby boomers will have retired, this ratio is projected to decline to around 3.4."

Saturday, February 5, 2011