Stephen Foley: Sluggish growth pushes US towards more QE

US Outlook: Nothing worth cheering in the latest US GDP figures, except perhaps that a second dip into recession remains off the table. The situation remains one of sluggish growth – too little to ease the burden of massive government and household debt quickly or to bring down the corrosively high level of unemployment – in an economy still uncomfortably close to deflation.

All of which is to say that next week's monetary policy meeting of the Federal Reserve could not be more timely or important. At this meeting, the US central bank is set to embark on a new round of quantitative easing, announcing its intention to purchase perhaps $500bn (£320bn) of long-term government bonds. Markets have taken a sceptical turn in recent days, arguing the scheme may prove to have only a limited impact on long-term interest rates. But so-called QEII opens up a whole new era for monetary policy. At last, the Fed is willing routinely to act directly on long-term rates, rather than relying that its influence on overnight rates will be transmitted through the credit markets. William Dudley, the chairman of the New York branch of the Fed, reckons $500bn of purchases equates to a 50 basis point cut in the old Fed funds rate, a neat rule of thumb.

The prospect of QEII has already increased inflation expectations (inflation-protected Treasuries, called Tips, sold at a negative interest rate earlier this week, such was the demand) and policy discussion is now turning to other means for raising inflation, such as setting a target for the overall price of goods and services in the economy, implying an accelerated consumer price index in order to get there.

Slowly, slowly, the Fed is working to inflate away America's enormous debts. The question is whether it will do enough to kick economic growth into a higher gear – or will simply usher in a long period of stagflation.