The answer is not a great deal. The monetary tool kit is already depleted. The US Federal Reserve is on course to complete the $10bn a month taper by the autumn. Even if the latest data prompted the Fed to change course, putting the taper on hold would make little difference and could even backfire. Headline inflation is inching uncomfortably close to the Fed’s target of 2 per cent.
Moreover, the US labour market is creating on average about 200,000 jobs a month, which suggests the economy is on track to return to full employment. To be sure, if anaemic growth persists, the Fed ought to delay the turn in the interest rate cycle, which is expected in the first half of 2015. But signalling another reprieve would not, in itself, be enough to kindle animal spirits. The Fed has done as much as it can to assist the recovery.
Which leaves fiscal policy. Most economists expected 2014 to be the year of take-off since it was the first in which US fiscal policy was neutral after consecutive years of contraction. Having narrowly averted the fiscal cliff, and a voluntary sovereign default in 2013, Congress would no longer be part of the problem. Alas, it is still not part of the solution.
The best it could do to boost consumer sentiment in the short term would be to reinstate benefits for the long-term unemployed and guarantee food stamps for the poor. In both cases, however, Capitol Hill is going in the wrong direction. Nor is there any prospect Congress will approve new infrastructure spending, which is the kind of stimulus that ought to be obvious in this climate. But there is nothing logical about Washington’s gridlock.
At best, Capitol Hill will continue to sit on its hands. At worst, it will actively damage the US recovery. The shock Tea Party ejection of Eric Cantor, the number two Republican in the House of Representatives earlier this month, has put a chill over the most routine legislative business.
At a time when export growth will be critical to the US recovery, Congress is on course to deny reauthorisation to the Export-Import Bank, which underwrites sales to volatile markets. Exim’s mandate expires in September. It is hard to think of a more ill-conceived gesture. The same applies to brinkmanship over the Highway Trust Fund, which will also run out in September. Spending on US roads could rapidly dry up. The damage to market confidence would be as predictable as it was needless.
The aftermath of the 2008 meltdown continues to be sobering. Most economists assumed there would be a traditionally strong rebound.
That remains as elusive as ever. Each year, leading forecasters, including the Fed, downgrade US trend growth another notch. The task for policy makers is to understand what is constraining US growth and what they can do to help. As long as Washington gridlock persists, that challenge looks beyond reach.