This is a very interesting comment from El-Erian…

My thoughts:

So while markets have been conditioned to expect ever greater central bank intervention whenever the data weakens or sovereign spreads spike in Europe, the cost-benefit equation within the Fed has gotten considerably trickier. There is now much greater appreciation that the policy response, no matter how imaginative, can do little on its own to address decisively America's challenges of too little growth and employment, too much long-term debt and too great a political polarisation.

So, this time around,the Fed decided to talk the talk but not walk the walk. It is unwilling to do anything now, also reflecting a desire to keep dry whatever policy ammunition remains in the event that Washington is unable to deal with the fiscal cliff and Europe takes another turn for the worse. And while it signaled a willingness to do more should conditions deteriorates, I suspect that it wishes this to be in support of other policy measures rather than substituting for them.

The Fed's attempt to overcome its policy dilemmahas little chance of succeeding given the degree of political dysfunction in Washington. It is only a matter of weeks until, once again, Fed officials will feel compelled to act, and despite full knowledge that their measures will have limited effectiveness in delivering desired outcomes.

Most fundamentally, what is being illustrated again in all this is that what the US faces today is as much a political problem as it is an economic one.Until the political system steps up to its strategic leadership challenge, America will risk the trap of policy purgatory.


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