Whisper it abroad: The U.S. economy is on the mend. Most recent indicators suggest that, five years after the start of the Great Recession, the “L-shaped” recovery is finally heading north. The stock market is booming, and home prices are on the upswing. The rising price of houses makes people feel richer, and consumer confidence is on the mend. Private borrowing is up, and consumers are starting to spend again.
Growth is not great, about 2.5 percent to the end of the year, when the postwar average is 3.2 percent, but it is steady and appears to be self-sustaining. And this despite the 1.5 percent reduction on what growth would be were it not for the clumsy sequester’s fiscal drag. The general outlook is bright, if not sunny. As Winston Churchill said after the Battle of Alamein, “This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”
Why whisper this good news? Because the idea that we have achieved recovery suggests to some it is time for the Federal Reserve to change tack. Monetary policy is the only instrument the administration has left. Hampered by a hostile House of Representatives, President Barack Obama’s “jobs bill” to stimulate the economy is long forgotten. Even he doesn’t mention it anymore.
But the Fed has a medium-term strategy that means keeping interest rates low so long as unemployment remains stubbornly high. It therefore plans to continue pumping money into the economy through quantitative easing at the rate of $85 billion a month to the horizon. The last meeting of the Fed’s board maintained a steady-as-she-goes policy, with the usual suspect in the minority anxious about the inflationary implications of quantitative easing.
There is no inflationary pressure, nor is there likely to be. The austerity policies of the European Union, the only rival to America in terms of size and sophistication of economy, have pushed the euro bloc into recession and are keeping the euro weak. The same is true of Britain, where austerity has led to a near-triple-dip recession and sterling is trading lower. America’s old trade rivals the Japanese are on a QE binge, and the yen is sinking fast. As the world’s biggest economy is still growing, there has been a flight to the dollar that has pushed up the exchange rate and kept domestic inflation down.