The Fed will tonight step into the twilight zone. The relentless comments from Fed members and planted articles in leading papers leave no doubt that another round of asset purchases will commence in the coming days. The size and shape is still up for debate, but an inter meeting size of $75 to $100Bn seems to be the consensus view now. The debate still rages as to what the benefits will actually be from a further expansion of the Fed's balance sheet. Some feel that it is a huge mistake at this point, when recent data suggests the recent 'soft patch' may already be abating. Others feel that, with the economy close to stall speed, another round is necessary as a further shot in the arm.

Clearly the stronger growth experienced in late 2009 and early this year was driven by fiscal and monetary stimulus, and the inventory cycle. As stock markets began to recover at the onset of the previous QE program, confidence rose and many pundits suggested the beginning of a V shaped recovery. 'Green shoots' was the favourite phrase of so many commentators, even used by Bernanke himself back in March 2009. As the program to buy $1.75Tn Mortgages, Agencies and Treasuries expired in April of this year, so did the stamina in the stock markets.

The weakness in equities had an immediate, negative impact on confidence, both business and consumer. At the same time, the tax credit offered to potential buyers of property also ran out, crushing the fledging recovery in residential turnover. By the summer, the outlook was revised much lower by most forecasters, including those at the Fed. Looking for further stimulus from the Democrats was a non starter, with Obama's approval rating falling and the Republican's demand for an assault on the burgeoning deficit. The easy policy of the last 18 months had not even dented the unemployment rate, or the growing number of long term unemployed.  The huge spare capacity in the system kept downwards pressure on core inflation. High unemployment and falling core inflation had the Fed failing both of its goals in the dual mandate. Further action was required.

Although it likes to talk about the various options open to it in terms of further stimulus, in truth the Fed's scope is very limited. Printing money and buying Treasuries is the only method it has to put cash in the hand of the consumer. The extra dollars will fuel another rally in the stock market, which in turn makes companies and stock holders wealthier. This should increase confidence once more, and drive consumption. Other by-products will be low government yields and a weaker dollar, (both positive), and rising commodity prices, (a negative). Sadly, the distribution of this positive wealth effect doesn't generally spread to the areas that most need assistance. Large companies have been enjoying a fantastic period of earnings in recent quarters, particularly those who ply their trade across the globe and those connected to commodities. These companies don't need further assistance from the Central Bank. The less wealthy individuals in the US, and the small, domestic facing companies have not seen the end of the Great Recession. While the rich will get richer through their investment portfolios, there are more than 40 million people living off food stamps that won't feel the comforting arm of the Fed around their shoulder.

QE is a necessary support for the US economy as it rumbles along its protracted, deleveraging path. With the Republican's recapturing the House, any further fiscal aid over the next two years will be minimal. The fate of the economy, for now at least, lays in the hands of Bernanke and the Fed. Good luck.