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The Federal Reserve has announced that it will be further buying treasuries worth six hundred billion dollars in the form of long term bonds. In a statement released in the form of an article to one of the leading national dailies, the Chairman of the Federal Reserve defended his actions by stating that similar steps have successfully been used in United States as well as other nations in the past to promote healthy fiscal growth. According to the administration, the previous injection of liquidity had reversed the downward slide of the economy but had left a lot to be desired in terms of employment generation and spending stimulus. With this additional inflow, coupled with near zero short term interest rates, the Fed hopes to boost fresh home buying and trigger off a prolonged bout of spending. The timing of the announcement, so close to the holiday season, cannot be termed as accidental, though, it remains to be seen if it will help spread the holiday cheer or if any of that cheer will come back to the beleaguered Chairman. Although it remains too premature to comment upon the long term effects of the multiple stimuli, initial signs, though not overtly encouraging, have not been depressing either, with the retail data showing an increase in spending and manufacturing data also showing a jump that is the most in the last half year.
However, the reaction in many emerging economies has been less than euphoric and from a strictly fiduciary point of view, there seems to be a lot of merit in the statements of these nations. Although no nation has come out openly and slammed the move, the strategists and analysts who function as governmental mouthpieces have been, without exception, critical of what they call ‘uncontrolled money printing’ by the United States. While the U.S.A. has been accusing China of artificially devaluing its currency, an advisor to the Central Bank of China has hit back at Washington by accusing it of employing tactics that would devalue the dollar. Even Japan, the traditional ally of America, has voiced similar concerns. Many fear that the additional liquidity will find its way into the developing nations’ capital markets and most likely create an asset bubble in the emerging markets where the capital markets have been outperforming the global indices. There are indications that the central banks of many of these nations are in touch with each other and are contemplating a collective action if a sudden surge in volumes in stock markets creates a scenario for galloping inflation. Many banks in Asia Pacific have increased interest rates or are mulling the same to curb inflation.