Stephen Foley: It won't take much for fears of a lost American decade to become reality


US Outlook: If the stock market's reaction to his testimony before Congress this month doesn't jolt Federal Reserve chairman Ben Bernanke out of his complacency, then maybe the little tap on the shoulder he got from his colleague James Bullard might.

Mr Bullard, president of the St Louis branch of the Fed and a member of the central bank's monetary policy committee, just published a research paper saying the Fed might be talking the US into a Japan-style nightmare of deflation and sluggish economic activity.

US interest rates have been at zero since December 2008 and, at each meeting, the Fed's open market committee has reiterated its plan to keep rates "exceptionally low" for "an extended period". Mr Bullard argues that this incantation is starting to have a perverse effect. Instead of assuring business that the Fed will rev up the economy, and with it inflation, the words now seem to presage a world of persistently low rates and persistently low prices.

Deflation rightly scares central bankers. It is the great shriveller of economic activity, and there are no clear ways to stop it once it starts. In a deflationary environment, business and consumers reasonably ask: why do today what you can put off until it is cheaper tomorrow?

There are enough drags on the US economy as is. Large public and private debts have to be sweated off. An ageing population increasingly turns its face against the immigrants who might add some compensating dynamism. The quarterly earnings season just coming to a close has divided companies broadly into two camps, those who do business in Asia (who are upgrading their forecasts) and those who rely on the US (who are gloomy). It won't take much in this climate to turn fears of a US "lost decade" into a reality.

Mr Bullard is making the case for insurance. By contrast, Mr Bernanke, bafflingly, went out of his way to suggest indifference. The Fed chairman made no mention of contingency plans for a double dip recession in his testimony to the House or the Senate last week, and when asked what the bank might do if the economy did turn down, he made a half-hearted list that began with "further changes or modifications of our language describing how we intend to change interest rates".

As Mr Bullard points out, there is nowhere to go from zero in interest rate policy. If central banks want to have the sort of leverage over inflation expectations that they have in traditional, higher-rate environments, he said, then they have to open up the toolbox to quantitative easing. This from a traditionally hawkish economist. He is not arguing for any statement that the Fed will pump newly minted money into the economy by buying Treasuries; only that it is willing if needs be.

Having pulled quantitative easing out of the hat last year, and after numerous wonderful, unconventional tricks to ease the financial panic, Mr Bernanke is now reverting to pre-2008 type. His unwillingness to discuss levers other than interest rates is of a piece with his insistence that monetary policy ought not be used against asset bubbles and with the tardiness of his reaction to the credit crunch in 2007. For business leaders to regain their animal spirits, and the world's largest economy to regain its poise, we need a central bank that shows itself bolder and wiser than this. Under Mr Bernanke's chairmanship, the Fed has proved creative in a crisis, less so when it comes to preventing one. Mr Bullard's intervention is timely and welcome.

News
people
Arts and Entertainment
Joel Edgerton, John Turturro and Christian Bale in Exodus: Gods and Kings
filmDirector said film would 'never have been financed' with ethnic minority actors in key roles
News
people
Sport
footballArsenal 2 Borussia Dortmund 0: And they can still top the group
PROMOTED VIDEO
Arts and Entertainment
An unseen image of Kurt Cobain at home featured in the film 'Kurt Cobain: Montage of Heck'
film
News
Andy Murray with his girlfriend of nine years, Kim Sears who he has got engaged to
peopleWimbledon champion announces engagement to girlfriend Kim Sears
Arts and Entertainment
Jake Quickenden and Edwina Currie are joining the I'm A Celebrity...Get Me Out Of Here! camp
tv
Arts and Entertainment
George Mpanga has been shortlisted for the Critics’ Choice prize
music
News
Albert Camus (left) and Jean-Paul Sartre fell out in 1952 and did not speak again before Camus’s death
people
Arts and Entertainment
Roisin, James and Sanjay in the boardroom
tvReview: This week's failing project manager had to go
News
ebooksNow available in paperback
News
Ed Miliband visiting the Holocaust museum in Jerusalem. The Labour leader has spoken more openly of his heritage recently
newsAttacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But are the barbs more sinister?
Arts and Entertainment
'Felfie' (2014) by Alison Jackson
photographyNew exhibition shows how female creatives are changing the way women are portrayed in advertising
News
i100
Life and Style
Fright night: the board game dates back to at least 1890
life
Environment
The vaquita is being killed by fishermen trying to catch the totoaba fish, which is prized in China
environmentJust 97 of the 'world's cutest' sea mammals remain
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultants

£20000 - £25000 per annum + OTE £Competitive: SThree: SThree Group and have be...

Langley James : IT Support; Helpdesk, VMware; Manchester, £18k

£16000 - £18000 per annum: Langley James : IT Support; Helpdesk, VMware; Manch...

h2 Recruit Ltd: Business Development Manager - HRO - £70k+ ote

£35000 - £450000 per annum + £3k car, £70k ote: h2 Recruit Ltd: Do you want to...

Citifocus Ltd: Newly Qualified Accountants - Risk Mgmt

£Attractive Package: Citifocus Ltd: Prestigious financial institution seeks to...

Day In a Page

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

Sol Campbell cries foul at Labour's mansion tax

The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

Sarkozy returns

The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
Is the criticism of Ed Miliband a coded form of anti-Semitism?

Is the criticism of Miliband anti-Semitic?

Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

Ouija boards are the must-have festive gift

Simon Usborne explores the appeal - and mysteries - of a century-old parlour game
There's a Good Girl exhibition: How female creatives are changing the way women are portrayed in advertising

In pictures: There's a Good Girl exhibition

The new exhibition reveals how female creatives are changing the way women are portrayed in advertising
UK firm Biscuiteers is giving cookies a makeover - from advent calendars to doll's houses

UK firm Biscuiteers is giving cookies a makeover

It worked with cupcakes, doughnuts and macarons so no wonder someone decided to revamp the humble biscuit
Can SkySaga capture the Minecraft magic?

Can SkySaga capture the Minecraft magic?

It's no surprise that the building game born in Sweden in 2009 and now played by millions, has imitators keen to construct their own mega money-spinner
The King's School is way ahead of the pack when it comes to using the latest classroom technology

Staying connected: The King's School

The school in Cambridgeshire is ahead of the pack when it comes to using the latest classroom technology. Richard Garner discovers how teachers and pupils stay connected
Christmas 2014: 23 best women's perfumes

Festively fragrant: the best women's perfumes

Give a loved one a luxe fragrance this year or treat yourself to a sensual pick-me-up
Arsenal vs Borussia Dortmund: Alex Oxlade-Chamberlain celebrates century with trademark display of speed and intuition

Arsenal vs Borussia Dortmund

The Ox celebrates century with trademark display of speed and intuition
Billy Joe Saunders vs Chris Eubank Jnr: When two worlds collide

When two worlds collide

Traveller Billy Joe Saunders did not have a pampered public-school upbringing - unlike Saturday’s opponent Chris Eubank Jnr
Homeless Veterans Christmas Appeal: Drifting and forgotten - turning lives around for ex-soldiers

Homeless Veterans Christmas Appeal: Turning lives around for ex-soldiers

Our partner charities help veterans on the brink – and get them back on their feet
Putin’s far-right ambition: Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU

Putin’s far-right ambition

Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU
Tove Jansson's Moominland: What was the inspiration for Finland's most famous family?

Escape to Moominland

What was the inspiration for Finland's most famous family?