The tightrope that the Federal Reserve is walking keeps getting thinner. The need to support Fannie Mae and Freddie Mac, the two giant mortgage lenders sponsored by the US government, is a reminder that financial conditions pose significant risks to growth; headline prices now 5 per cent higher than a year ago mean a rising risk of inflation. The Fed may not be able to keep its balance much longer, and if it falls, it must be on the side of controlling inflation, not sustaining growth.

The package of support for Fannie and Freddie has few direct consequences for the macroeconomy. It eliminates the risk of an unlikely but catastrophic event – the failure of one of the two – but draws attention to the strain that the pair could place on the US government’s balance sheet. Fannie and Freddie can now keep lending, but some regional banks, such as troubled IndyMac, may not be able to. Tough credit conditions, and the fear of another Bear Stearns-style crisis, remain serious threats to growth.