Looking at May's ugly jobs report, you can just picture Ben Bernanke stroking his well-manicured beard and thinking, "What now?"
At a press conference following the April Federal Open Market Committee meeting, the Federal Reserve Chairman signaled that a third round of quantitative easing—in which the Fed buys up assets in order to inject more money into the economy and lower interest rates—is still a policy option.
"If appropriate, and depending also on assessment of the costs and risks of additional policy actions, we remain entirely prepared to take additional balance sheet actions if necessary to achieve our objectives," he said. "So those tools remain very much on the table, and we will not hesitate to use them should the economy require that additional support."
Given that the economy appears to be decelerating, Bernanke and his fellow FOMC members may decide to undertake a third round of quantitative easing, also known as QE3. The problem is that it may not do much good.
First, there is the question of whether the Fed will undertake more easing. Slowly, the factors that would make QE3 more likely seem to be piling up.
At his April press conference, Bernanke laid out the factors the Fed would consider: "In particular, we will continue to assess, looking at the economic outlook, looking at the risks, whether or not unemployment is making sufficient progress towards its longer-run normal level, and whether inflation is remaining close to target."
Bad economic outlook? Check. First-quarter GDP was revised to below 2 percent this week, and threats from Europe and a potential "fiscal cliff" are making for a shaky outlook.
Insufficient jobs progress? Looks like it. "We've had two months of less than 100,000 job gains back to back, and I believe this is one of the reasons why the Fed may start asking itself, 'What do we do to help the economy?'" says Gregory Daco, principal U.S. economist at IHS Global Insight.
Below-target inflation? Maybe. The April CPI report said that prices rose at an annual rate of 2.3 percent, well above the Fed's stated aim of 2 percent. However, the Commerce Department's personal spending figures show that price inflation on personal consumption expenditures was at an annual 1.8 percent in April, as Daco points out.
Of course, the FOMC would also have to agree on such a decision, and some members, like Richmond Fed President Jeffrey M. Lacker, have been less supportive of accommodative policies, like a near-zero federal funds rate.
Still, there is potential for QE3. But if the Fed did decide to take new action, what good would it do?
According to Daco, accommodative action of any sort, QE3 or not, may have little effect.
"The potential for the Fed to help much more, much further in terms of lowering long-term rates is quite limited, given that rates are already at record lows," he says. Yields on the 10-year Treasury note slipped below 1.5 on Friday to record lows.
Indeed, already-low interest rates might make the Fed more hesitant to do more easing. "The 10-year bond yield is below 1.50. So haven't Europe and China done QE3 for them?" says John Canally, economist at financial advisory organization LPL Financial. "So that's an argument to keep in mind, that the Fed might be saying 'Listen. Even if we do QE3, whichever form that takes...is the risk-reward benefit still there?"
If the Fed does loosen its policy, Daco thinks it may be something more akin to last year's Operation Twist, in which the Fed bought more longer-term bonds and sold shorter-term bonds. Canally, for his part, thinks that the Fed is "probably leaning closer to it than they were before."
While it's easy to try to throw out predictions, it will be difficult to tell exactly how much more easing will help the economy. "I think [earlier easing] was quite effective in keeping rates lower for longer," says Canally. "But what would the economy have done had they not done that, we'll never know."