World markets are eagerly awaiting a speech by US Federal Reserve chairman Ben Bernanke at Jackson Hole Friday in which he is expected to signal his intention to try and boost the struggling US economy. The Federal Reserve has made it clear that — whatever the optimists might think — it believes the US economy is dangerously weak. The problem is that the bank does not have many effective tools left to try and prop it up.
Bernanke has already committed the Federal Reserve to keeping interest rates low in the foreseeable future. Making money cheap for companies, consumers and investors is the main way the bank can boost the economy. Unable to lower interest rates further, its other option is another round of quantitative easing — when effectively the bank simply prints more money. This should be avoided at all costs.
By printing money, the Federal Reserve will effectively be stoking inflation and devaluing the dollar, the international reserve currency. All this will do is store up problems for later.
The US economy is threatening to slide back into recession because there is no business or consumer confidence, mainly because of high unemployment. Rather than attempt increasingly complicated financial engineering, the Federal Reserve and US administration must concentrate on getting the real economy growing and creating jobs.
