The Fed is expected to use next week's policy meeting to repeat its intention not to raise interest rates unless unemployment falls to 6.5 per cent (it is currently 7.6 per cent) or inflation rises to 2.5 per cent.
Markets think this means the Fed funds rate won't rise until early 2015. But Michael Hanson, at Bank of America Merrill Lynch, says: "Rate hikes may be much further in the future than the market currently expects." He believes a combination of low wage growth and excess capacity around the world will keep inflation low. He expects the personal consumption expenditure deflator - the Fed's preferred measure of inflation - to rise only 1.4 per cent next year. That, he says, could mean the Fed continues its quantitative easing for longer than people expect.
Although cheap and easy money are ordinarily good news for US shares - hence the saying, "don't fight the Fed" - there are three reasons to fear it might not be so this time.
First, a big reason why monetary policy will stay loose is that the economy is weak. Official figures next Wednesday are expected to show that real GDP grew at an annualised rate of less than 1 per cent in the second quarter. And, while most economists expect stronger growth in the third quarter (of around 2 per cent annualised), this would not in normal circumstances be sufficient to reduce unemployment.
This weak growth is weighing upon corporate earnings, which, says Dan Morris at JP Morgan Asset Management, have been weak outside the financial sector. QE, he says, "is no substitute for profits".
Secondly, there are concerns that cheap money has already inflated equity valuations. Mr Morris says price-earnings ratios, based on expected earnings, are already slightly above their long-term median. Tim Price at PFP Wealth Management adds that they are very high, based on long-term trend earnings.
Thirdly, low inflation means there's a risk of deflation. And a new paper by economists at the University of California Los Angeles points out that this is closely associated with the risk of financial crises - in part because it raises the danger of firms having to default on their debts. "Systemic financial risk and deflation risk are closely related," they warn.
