With the economy still weak and the politicians unable to agree on a plan to lift the debt ceiling, it might be time for the Federal Reserve to embark on QE3.
Before you think I have lost my mind, please examine the three facts listed below.
First and most important, the economy — supposedly out of recession for two years — is not in good shape. After rising at a paltry rate of 1.9% in the first quarter, the gross domestic product likely crept ahead at an even slower pace in the second, according to the MarketWatch consensus. This is why the unemployment rate now stands at 9.2% — the highest since the end of last year.
The next fact worth noting is that any agreement to increase the debt ceiling will involve a tightening of fiscal policy. Indeed, such policy has already tightened, since spending by Washington has fallen substantially — enough to cost tens of thousands of federal employees their jobs.
Finally, long-term interest rates have backed up. After dropping to a 52-week low of 2.82%, the yield on the Treasury’s ten-year note (^TNX – News) has once again reached 3%. While its yield has been much higher, it has also been much lower and in this economy, lower is better.
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