It’s the policies, stupid. That should be the guiding light for everyone trying to figure out the course of the U.S. economy for the rest of the year. As things now stand, in the absence of any dramatic policy shift, the economy should continue on its present path—slow growth, a bit of job creation but not enough to move the unemployment rate more than a tenth of a percentage point or two, a sluggish although perhaps more stable housing sector, and a stock market trying to decide if the world is coming to an end or we are on the brink of a new golden age.

Unfortunately for forecasters, it is impossible to predict whether new policies will be put in place. And, if they are, how long it will take for the shift to make itself felt outside of the world of politics—in the real world in which consumers patrol the aisles of Wal-Marts, investors look for opportunities, and workers look for jobs.

We do know that the Federal Reserve Board is seriously thinking about launching the good ship QE2, the current euphemism for printing money. Which says something about the speed with which the economic outlook changes. It seems like only yesterday that the Fed was considering tightening by shrinking its balance sheet, Fedspeak for not renewing or replacing some of the loans it had outstanding. Now, new data have the Fed’s monetary policy gurus worried that the price level might just turn down, producing a deflation of the sort that has bedeviled Japan for decades. Of course no central banker dare mention the D word: the Fed prefers, “Measures of underlying inflation are currently at levels somewhat below those the [Monetary Policy] Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.”

If we know anything about what drives Fed policy it is that its fear of deflation exceeds its fear of inflation—the former being thought much more difficult to reverse. Perhaps, but only perhaps. Politicians whom the Fed must keep happy love inflation, since it initially produces a feel-good factor, gives them cheap money with which to repay debts they have run up appeasing various constituencies, and (they believe) creates jobs. The once fiercely held independence of central bankers from politics is dead, or at least in intensive care, a victim of the onslaught of the recession that the experts say ended this past June after 18 months, two months longer than the recessions of 1973-75 and 1981-82. So central bankers might just be tempted to pander to inflation-loving pols.

For now the Fed is prepared to “provide additional accommodation if needed,” leaving inflation worries for another day. Translation: We have our finger on the “start” button of the printing presses, but are stalling so we can decide if such signs as the decline in the corporate debt-default rate to pre-crisis levels, an unexpected increase in capital goods orders, and the August increases in the construction of new homes and in retail sales, will enable the QE2 to remain in port.

If the Fed pushes the button, it will increase the money supply by buying Treasury bonds. That should keep interest rates down, and depress the dollar. Indeed, the very possibility of the launch of QE2 already has the dollar heading south. Which under ordinary circumstances would be good news for exporters, and drive up the price of imports, helping to reduce the trade deficit. But both the Chinese regime and the Japanese government (the latter to the tune of a $23 billion purchase of dollars with more to come) are intervening in currency markets to make sure that the yuan and the yen, respectively, do not rise so much relative to the dollar as to cut into the flow of exports to America.

That has Congress preparing to force President Obama to retaliate against such currency “manipulation.” The president responded to that pressure by taking the opportunity at this week’s UN meeting to meet privately with Chinese prime minister Wen Jiabao and tell him that this is “the most important issue” in the two nations’ relationship. Wen, who earlier had told U.S. businessmen that China would not respond to pressure on this issue, emphasized the “common interests” between his country and the U.S. In short, no movement by the Chinese authorities who seem to assume that it is unnecessary to appease their best customer since that customer is also deeply in hock to China.

The Fed is not the only player with a policy that matters. The Obama administration is engaged in a combination of re-think and persistence. The former is reflected in the upcoming departure of Larry Summers, the director of the National Economic Council. Summers, variously praised for policies that prevented the Great Recession from becoming another Great Depression, or derided as unable to face down the president’s inner circle of politicians when important decisions were being made, is to return to Harvard, some say as always planned, others not so sure that he is voluntarily parting with his White House pass. No matter: he will be gone. That clears the way for Obama to appoint a businessperson to the post, which his advisers are urging him to do. Some of the president’s staff—Summers was one such—believe that words matter, that the president’s strident anti-business rhetoric is deterring businessmen from investing. They feel the business community would find the appointment of one of their own reassuring, and perhaps unlock the $2 trillion in cash held by major corporations. Whether such a symbolic move would cause businessmen to forget the abuse that the president has heaped upon them can’t be predicted.

Neither can we know whether the president’s persistence will pay off for him. He wants some tax breaks for small businesses, $50 billion more to spend on infrastructure to “create jobs for American workers,” and exclusion of the rich (the 2 percent of families earning more than $250,000 per year) from a renewal of the Bush tax cuts. In the best case, that exclusion would produce enough revenue to cover only nine days worth of the deficit, according to The Economist.

Some of Obama’s Democratic colleagues and all of the Republicans in Congress say they won’t go along with excluding high earners from the tax-cut renewal lest it discourage spending and investment by the small businesses that would have to cough up under the Obama plan. Republicans are demanding spending cuts, now, while Fed chairman Ben Bernanke favors a combination of some new spending now, combined with promises of deficit reduction when the recovery is more robust. If all of these conflicting proposals produce a deadlock in Congress, allowing all the tax cuts to expire, Bernanke will have to push the start button and keep the presses running overtime to avoid the dreaded double dip. Right now, it looks as if Congress would prefer to have the whole problem go away, and deal with it after the November elections.

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