It was not supposed to be this way. After tens of billions of dollars in bank bail-outs, hundreds of billions in fiscal stimulus, and trillions more in bond purchases by the Federal Reserve, the US economy was supposed to be fixed. This should have been the year of growth, and robust growth at that. Ben Bernanke, the Fed chairman, was meant to be anticipating his “central banker of the century” award, and enjoying a well-earned rest.
No such luck. Growth stalled over the summer; unemployment is stuck at a painfully high 9.6 per cent; and core consumer prices, excluding food and energy, rose by only 0.9 per cent in the year to August – much too close to zero for comfort. As a result the Fed is girding itself – with considerable reluctance and not a little self- doubt – for one last heave.
After their regular conclave in Washington this week the Fed’s rate-setters said they were “prepared to provide additional accommodation if needed to support the economic recovery”. This might not sound like fighting talk, but the markets knew it meant “we will be buying bonds again unless the economy perks up soon”. Buying bonds is a form of quantitative easing, so its likely return has quickly been nicknamed “QE2”.