One reason for this is that the policy might do no more than mitigate the current weakness in the economy. Latest figures show that industrial production fell 1.2 per cent in August; retail sales volumes have stagnated; and that new orders for manufacturers in the New York area have dropped to a two-year low.
All economists agree that if the economy does fall off the 'fiscal cliff' - caused by the expiry of temporary tax cuts at the end of the year - monetary policy won’t prevent recession. Ethan Harris at Bank of America Merrill Lynch estimates that the cliff could depress GDP by 4.5 per cent. With economists at the Boston Fed estimating that $600bn of quantitative easing (QE) last year added no more than 1.2 per cent to GDP, this implies that the Fed would have to buy well over $2 trillion of assets to have a hope of offsetting the predicted fiscal contraction. “If the fiscal cliff isn't addressed” said Fed chairman Ben Bernanke last week, “I don't think our tools are strong enough to offset the effects of a major fiscal shock.”
This highlights the fact that, when interest rates are as low as they can go, fiscal policy becomes a bigger influence upon the economy than monetary policy. Columbia University’s Mike Woodford, one of the world’s leading monetary economists, said recently that QE has “had little evident effect on aggregate nominal expenditure”.
Not everyone is so pessimistic, though. Chris Iggo at Axa Investment Managers says that, with real interest rates likely to stay negative until at least 2015, companies will want to invest some of their large cash holdings. This, he says, could cause a “significant upturn” next year in the economy and stock market. And Mr Harris expects the Fed to fulfil its promise to continue printing money until the labour market improves “substantially” - which could, he says, mean another $2 trillion of QE over the next two years. QE will work, he says, “but not very well”.
