Jun. 25, 2009 (United Press International) -- The U.S. Federal Reserve said it would continue to buy Treasury bonds and mortgage-backed securities despite hopeful signs of a recovery.
The Fed leaned on almost positive sound bites Wednesday, pointing out financial markets had "generally improved," and consumer spending had "shown further signs of stabilizing."
The slowdown is slowing down, the Fed said. In reaction, the Open Market Committee will keep bank-to-bank lending rates near 0 percent and maintain its plan to purchase $1.25 trillion in mortgage-backed securities, $200 billion in agency debt and $300 billion in long-term Treasury bonds.
On paper, the purchases drive up prices, but push down bond yields that are linked to consumer loans. In the U.S. economy, where 70 percent of the gross domestic product is made up of consumer spending, the Fed pointed out "job losses, lower housing wealth and tight credit" continued to put restraints on the consumers' urge to splurge.
But China may be on the verge of a splurge, The New York Times reported.
Recently, Geely Automobile Holdings agreed to a tentative deal to purchase Volvo Cars from Ford Motor Co. (NYSE:F PRS) (NYSE:F PRA) (NYSE:F) and Chinese industrial equipment producer Sichuan Tengzhong Heavy Industrial Machinery Co. agreed to buy the Hummer brand from General Motors Corp. (OOTC:GMGMQ) On Thursday, the Times said, Sinopec (NYSE:SNP) agreed to a $7.2 billion deal to purchase oil producer Addax Petroleum. (OOTC:ADXTF) (TSX:AXC)
The Obama administration, meanwhile, has filed a World Trade Organization complaint against China's export practices, which violate a critical scatter-shot of international policies, said former International Trade Commission Chief Economist Peter Morici.
In effect, "China subsidizes exports through tax rebates, regulated raw material prices, and other industrial policies that expand its foreign sales far beyond manufactured products that benefit from its abundant low-wage labor," Morici said in a statement released Thursday.
Further, China's industrial growth has driven up demand -- and, therefore, prices -- for oil, which contributes to the U.S. trade deficit with the Organization of Petroleum Exporting Countries.
China's requirement that foreign manufacturers tie in with Chinese companies to gain access to its huge market and currency manipulations amounts to subsidizing its export-oriented economy, Morici said.
How? The Fed and the Chinese government are in step, at least for now, as both are buyers of U.S. Treasuries. That helps U.S. consumers by lowering interest rates. U.S. consumers then turn to China for cheap goods, Morici explained.
Asian markets pushed upward Thursday. After tumbling 2.82 percent Tuesday, the Nikkie average in Japan gained 0.43 percent Wednesday and 2.15 percent Thursday. The Hang Seng index in Hong Kong gained 2.14 percent Thursday, while the S&P/ASX in Australia rose 1.29 percent. The Singapore Straits Times index rose 1.03 percent Thursday.
In midday trading in Europe, markets were down. The FTSE 100 in Britain fell 0.61 percent. The DAX 30 in Germany dropped 1.25 percent, while the CAC 40 in France fell 1.08 percent. The broader DJStoxx 600 lost 1.15 percent.
