By Richard Quest
I always believed it was a matter of time before the U.S. Fed (and probably the UK’s Bank of England) dusted off its voluminous check books and engaged in a further bout of quantitative easing (QE) by writing gargantuan checks pumping more money into ailing economies. Last week’s statement from the Fed’s monetary committee saying it “is prepared to provide additional accommodation if needed to support the economic recovery” suggests that time is close by.
To be sure, this isn’t the first time the Fed has said it is ready. Chairman Ben Bernanke prepared the ground at the end of August. At the central bankers’ get-together in Jackson Hole, he said “the Federal Open Market Committee (FOMC) will do all that it can to ensure the continuation of the economic recovery. Should further action prove necessary policy options are available to provide additional stimulus.” Initially both the statements look blindingly obvious; a bit like firemen saying, “if there’s a fire we will use the hoses AND water to put it out.” But in central-banker-speak these comments go further than merely telling us they have a plan. Here we are being warned ‘There is a fire. We have plugged in the hoses. We are ready to turn on the tap.’ So the question is what will cause them to take action?
The Fed and Dr. Bernanke have already given some pretty big hints and set out the ground rules. At its Aug. 10 meeting the FOMC said it would consider more stimulus “if the outlook were to weaken appreciably further.” A few weeks later, at Jackson Hole, Bernanke used the phrase “if the outlook were to deteriorate significantly.” So, has the U.S. economy “weakened appreciably” or “deteriorated significantly?” That is the crucial question.