With tax rates at the centre of the debate over how to revive the stalled recovery, the Federal Reserve is likely to spend its policy meeting on Tuesday weighing the merits of additional steps to stimulate the economy, while deferring some major decisions until later this year.
The meeting will be the Federal Open Market Committee?s last scheduled gathering before the mid-term elections. And, given that the central bank studiously tries to stay outside the fray, the politically delicate moment and the mixed economic indicators of recent weeks suggest that the Fed will hold off for now on a pivotal decision: whether to try to further stimulate the economy by resuming large-scale purchases of Treasury securities to push record-low interest rates even lower.
The central bank took a crucial step toward renewed stimulus last month when it voted to use money the Fed receives from its huge portfolio of mortgage-backed securities to buy long-term Treasury debt. Though fairly modest in scope, the action raised the possibility that the Fed might resume the asset purchases, a strategy known as quantitative easing.
The Fed concluded a major programme of such easing in March. The idea behind easing is to put downward pressure on long-term interest rates. Short-term rates, over which the Fed has more direct influence, have already been at nearly zero since the end of 2008.
At the Fed?s annual policy symposium in Jackson Hole late last month, Fed chairman Ben Bernanke made clear he was prepared to take additional action to forestall the danger that the American economy might fall into deflation, a sustained period of falling prices like the one that has afflicted Japan since the early 1990s. Although the Fed considers that danger remote, it is worried because inflation is running at only about half the desired level of about 2%, while unemployment stands at 9.6%.
The committee?s meeting on August 10 was dominated by a vigorous discussion over the decision to reinvest the mortgage-related bond proceeds ? an approach Bernanke favored. The meeting on Tuesday will probably be used to assess actions the committee might take at its meetings on November 2 and 3 and December 14. ?Officials are likely to spend much of the session debating the pros and cons of the various stimulus options so that they can be ready to act should future data prove disappointing,? Richard Berner, chief United States economist at Morgan Stanley, wrote in a report last week.
