As already discussed, there is a weak signal for every strong one in the US economy. Fed Chairman Ben Bernanke already said that QE programs have “diminishing returns“. This was followed by saying that non-standard tools shouldn’t be used lightly and that the tools have “some capacity” to help the economy – not very QE3ish.
Bernanke could use the annual Jackson Hole Symposium held at the end of August to float other ideas. One such idea is a program that will help small businesses, although it’s unclear what the Fed could do. Two years ago, Bernanke hinted about QE2 at this important meeting.
Another thing Bernanke already did in the past is pass the ball to the politicians’ court. He warned about the “fiscal cliff” several times. At the end of the year, many tax programs expire and unless politicians move to extend these programs or introduce new schemes, the US economy will suffer from automatic tax hikes and spending cuts – something that could hurt the economy if everything happens all at once.
It is reasonable to assume that politicians will find some kind of compromise after the elections in November. One of the things that will happen automatically is a cut in the defense budget. Politicians are already working to prevent this from happening, even before the elections.
This is somewhat surprising, as an overwhelming majority of Americans support big cuts in the defense budget.
Bernanke will not get into details about taxes or spending, but will likely warn about this danger, and the current uncertainty, that also inflicts some damage on the economy.
The motivation for QE1 was lowering long term interest rates. The motivation for QE2 was the threat of deflation. Deflation isn’t a danger at the moment, especially with recent US droughts and rises in food prices.
But even without deflation, could the Fed strive for higher inflation? More on that next time.
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