The Federal Reserve’s decision to move to a kind of quantitative neutrality is a tacit admission that it, or rather that the United States, is in a political bind that makes a bold response to a deteriorating economy difficult.
Despite reams of evidence that conditions are worsening — much of it cited in the statement the Fed made as it left rates on hold — the U.S. central bank made only a token gesture; announcing that as mortgage-related debt it holds on its balance sheet comes to term and is repaid it will replace it with new, mostly long-term, Treasuries.
That keeps its quantitative easing policy essentially static, a strategy dubbed “quantitative neutrality” by Northern Trust economist Asha Bangalore.
So, given that key measures of inflation are trending towards zero, that businesses are reluctant to hire, that corporations and banks alike are sitting on cash and that the outlook for the recovery, if indeed we want to call it that, is dimming, why such a feeble response?
In the end monetary policy has to have a political consensus behind it, and there is arguably less of that now than at any time in my 20 years of following markets.