The short-term fate of the US economy is at the mercy of a poker game currently being played out in the US Congress, with the Federal Reserve hesitant to take any further action despite a rapidly deteriorating US economy, diminishing growth in China and stagnation in solving the European debt crisis.

Adjectives such as modest, moderate, slow, and tepid are in vogue when describing the current state of the US economy.

Growth slid from 3 per cent in the fourth quarter of 2011to just 1.9 per cent in the first quarter of 2012. The June ISM report, a monthly report based on a national survey of purchasing managers, showed a contraction, the first since July of 2009.

The latest employment numbers were discouraging, with only 80,000 jobs created; the unemployment rate stubbornly stuck at 8.2 per cent.

In his official twice-yearly testimony to the Senate Banking Committee, Federal Reserve Chairman Ben Bernanke painted a dismal picture of the economy, hinting that there is further weakness ahead.

While he said that “the economy is growing modestly but has weakened”, he subsequently warned that a recession would occur early next year and about 1.25 million fewer jobs would be created in 2013, if the government doesn’t act to address the looming fiscal cliff.

The term “fiscal cliff” has been coined to describe the January 1, 2013, mandate whereby everyone’s marginal tax rate will rise and automatic spending cuts will begin to take effect.

These tax hikes and spending reductions, compounded with European and China woes, firmly strengthen the probability that the US is headed for a recession.

Senator Chuck Schumer, a New York Democrat, instructed Bernanke to “Get to work, Mr Chairman”, a sentiment most of the committee expressed.

In contrast, the chairman advised the committee that it is the government that needed to act, saying: “The most effective way that the Congress could help to support the economy right now would be to work to address the nation’s fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery.”

Although it appears both sides are passing the buck and there is a stalemate, the likely outcome is that both the Fed and Congress will take legislative action later in the year to avoid an imminent recession.

Congress will likely postpone the tax increases and spending deductions after the November 2012 presidential election and the Federal Reserve will probably act in the third quarter with a third round of quantitative easing.

In November 2010, the Federal Reserve implemented a US$600 billion QE2 program to spur economic growth and to create more jobs. This was at time the nation’s unemployment rate was at an alarmingly high 9.6 per cent.

The S&P 500 stock market gained 6 per cent, Treasury yields went up from 2.5 per cent to 3.4 per cent with gold and silver trading at all time highs.

QE3 is inevitable. Boston Fed President Eric Rosengren has already said quantitative easing is “appropriate as labour market growth has slowed” and “the global economy is vulnerable”.

If history repeats itself, the dollar will likely decline and asset prices should rise, particularly stocks and commodities. Adjustments to investor portfolios in anticipation of QE3 would now be timely.

Anthony Galliano is the chief executive of Cambodian Investment Management.

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