Belfast Telegraph

This flexible Federal Reserve is no laughing matter for us all

By Sean O'Grady

It reads like a particularly unpromising joke. Charlie Bean, deputy governor of the Bank of England, Ben Bernanke, chairman of the US Federal Reserve, and Jean-Claude Trichet, president of the European Central Bank, are walking in the magnificent mountains of Wyoming.

They're at the annual get-together of global central bankers and external economists, held at the Kansas Fed's retreat, which happens to be in Jackson Hole, Wyoming, a beautiful spot for hiking (their tubby little bodies, that is, not necessarily interest rates).

Admiring the view, the three lords of finance stop for a moment to catch their breath. Ben asks Charlie how the UK recovery's going. “Choppy,” he replies. He then turns to Jean-Claude, and asks him the same. “Very bumpy,” says the Frenchman. Ben then thinks for moment and declares: “I just wish I could be as precise as you guys.”

OK, I did warn you that it wasn't very funny. Central bank-based humour is unlikely to supplant sex or booze as a comedic resource, but you take my point, I hope.

Of all the world's major economies, the US is the one where the most acute dilemmas are being felt, if only because it is pretty much the only one where the full range of policy options are being kicked around in a lively public debate.

While the British and Europeans know what they want to do (even if they happen to be wrong), the Americans are still in a state of some flux. For now, at any rate, the British and Europeans have turned their backs on further fiscal action to sustain their choppy, bumpy recoveries and, if needs be, will rely on monetary policy to do the heavy lifting if a double dip hoves onto the horizon. In the US, thinking is more flexible.

It needs to be. Only a few months ago the US seemed to be fulfilling its usual role of economic locomotive, dragging the rest of the world out of the worst slump in three-quarters of a century.

Taking maximum advantage of the US Treasury's bonus of a seemingly infinite appetite for its paper, the Americans borrowed and spent their way out of trouble, complemented by an unprecedented monetary stimulus from the Fed.

Lately, however, the news has not been so good, and there is an unmistakable link between the withdrawal of specific federal subsidies and unwelcome economic developments.

Nowhere is this clearer than in the world of real estate, where the last few days have seen some shocking numbers on sales of new and existing homes (the Americans still build sufficient new property for it to command its own index). Indeed the July figure for new home sales was an all-time low, and down about a third on last year.

The reason is that the $8,000 tax break available for first-time buyers expired at the end of June, with predictable consequences. Much the same goes for the aftermath of the end of the cash-for-clunkers scheme and the lay-off of temporary staff hired for the US Census. And it also goes, more generally, for the gradual fading of the government's $814bn stimulus plan.

The message is that the American economy is unable to flourish without the life-support offered by fiscal action. A realisation of that was behind Congress's decision, after a Republican filibuster, to extend the federal subsidy for unemployment pay of 99 weeks' cover.

Even by the usually intense standards of Fed-watching, Mr Bernanke's speech to the Jackson Hole meeting will be weighed, parsed and dissected minutely.

In modestly extending its “quantitative easing” programme — directly injecting money into the economy — a few weeks ago, the Fed has signalled in actions as well as words that it stands ready to rescue the US economy. But within the Fed there is also a lively debate.

Like the Bank of England's Andrew Sentance, the Fed has its own lone hawk, Thomas Hoenig, arguing for a tightening of monetary policy.

Mr Hoenig just happens to be the head of the Kansas City Fed, and thus was host at Jackson Hole. No one wants to be rude to the hand that feeds them, but it appears likely that Mr Hoenig was in a minority of one once again. In the speeches that British audiences will find most relevant, from Ben Bernanke and Mr Bean, we may well find some broad hints about these central bankers' willingness to launch another round of quantitative easing — ‘QE2’ — to boost growth.

But it may be simply too much to expect of monetary policy alone.

It's just a pity that, while the Obama administration is also thinking imaginatively, our own coalition Government is determined to stick to its spending cuts no matter what.

The Government, and more to the point the rest of us, may regret that stubbornness.

Belfast Telegraph

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