Between a rock and Jackson Hole – the Fed is coming

Over the past three years, the U.S. economy has faced a wide range of challenges. Some were unique to the U.S. economy and policy environment, and others were global in scope. When Federal Reserve policymakers today and tomorrow to decide whether to take action to boost the economy, it will be a ‘close call,’ working our way to the eve of a speech by chairman Ben Bernanke from Jackson Hole that has global markets on tenterhooks.

The Fed in late 2008 slashed interest rates to near zero and has bought $2.3 trillion in assets in an unprecedented drive to revive the economy after the worst recession in decades. Yet the recovery, especially in jobs, has been slow and economic growth stumbled this year, stoking expectations the Fed will act again.

But with economic data in recent weeks relatively better, and some central bankers worried that QE3 would have little benefit, nothing is certain. Policymakers across the Fed’s philosophical spectrum have taken their sides in the court in recent days, with Chicago Fed president Charles Evans on one side calling for immediate QE3 and Richard Fisher of Dallas on the other saying nothing has been decided.

The Fed is really between a rock and a hard place on this. If the economy’s recovery is relatively slow, it gets blamed by economists for not being more aggressive. However, if the recovery accelerates and inflation rises above target, Republicans will continue to attack the Fed as being reckless with “printing money”. So, given that the Fed, albeit independent from politics on paper, is still impacted by politics, it’s not surprising that it is working to thread the needle with a moderate policy course that leads to it getting attacked the least.

In the end, regulating the economy, both the government and the central banks need to work in tandem and in a balanced fashion in order to balance growth and inflation. The end objective of every government is to increase growth and decrease inflation. Various permutation and combinations of monetary policy and fiscal policy need to be applied to get the optimum results.

Have a look at my Scoop.it bord for some various standpoints : http://www.scoop.it/t/can-the-fed-do-more

For 4inmore – P.C van der Walt

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