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News Tip: Reducing Policy Uncertainty Better for Economy Than Quantitative Easing
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The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System, will convene on July 31. There is a strong chance that the committee will approve another round of quantitative easing. Will it work?
- Campbell Harvey
J. Paul Sticht Professor in International Business, Duke University's Fuqua School of Business
Harvey is available Monday evening, after 2:30 p.m. Tuesday and throughout Wednesday.
"The key driver to growth is investment. We find new evidence suggesting that small tweaks in the interest rate will not have a measurable impact on investment.
The cost of borrowing is already amazingly low. Rates are rock bottom -- we haven't seen levels like this in 50 years. Yet investment has not responded. It is unlikely that lowering the interest rate a little more will produce any measurable effect."
"The recent Duke University/CFO Survey found that the average hurdle rate for new investments was 13.5 percent. That is, firms will not even consider investments unless they have projected returns of at least 13.5 percent a year. There is no doubt that if firms pursued all the 13.5 percent projects this would drive substantial growth -- but they are not."
"There is an extraordinary amount of uncertainty due to a number of known unknowns: a slow-moving train wreck in Europe, stubbornly high unemployment in the U.S., four years of trillion-dollar fiscal deficits, Iran and other Mideast hotspots, the stalling of the Chinese growth engine, and the U.S. election."
"It would be far more effective for our policy makers to pursue an agenda with the goal of reducing policy uncertainty. The patient will best return to health in a stable environment."
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