Hopes turn to Fed as US slows

US economic growth slowed in the second quarter as consumers spent at their slowest pace in a year, increasing pressure on the Federal Reserve to do more to bolster the recovery.

Gross domestic product expanded at a 1.5 per cent annual rate between April and June, the weakest pace of growth since the third quarter of 2011, the Commerce Department said on Friday.

First-quarter growth was revised up by a tenth of a per cent to a 2.0 per cent pace.

Details of the report were weak, with foreign trade being a drag and stocks of unsold goods rising. That, together with signs that activity slowed further early in the third quarter strengthens the argument for the Fed to offer the economy additional stimulus at its September meeting.

"The economy has lost altitude and flying pretty close to stall speed. Monetary policy is the only game in town and additional easing is highly likely," said Sung Won Sohn, an economics professor at California State University Channel Islands in Camarillo, California.

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Editor's note: There is little Ben Bernanke and the Fed can do to stimulate demand in the US economy at this point.

Usually a central bank (such as our RBA or Germany's Bundesbank) would use what are called 'open market operations' to make money cheaper for banks and therefore give the economy a boost through lower interest rates.

Unfortunately for the US, the Fed's cash rate is already down at 0.25%

When you combine this with the 1.75% inflation rate in the US, the real cost of money from the Fed is -1.5% Talk of a third round of bond purchases smack of band-aid solutions and monetary policy is already doing its job.

There are other tools the Fed can use to stimulate the economy, but right now the better bet would be to help stabilise business confidence, and for the US, this has always meant simplifying the mountains of opaque legislation streaming out of Capitol Hill.