A lengthy and contentious debate on communications is set to occupy most of the Federal Reserves time when it meets on Tuesday and Wednesday next week.
Large changes to monetary policy are relatively unlikely - not least because waiting will bring greater clarity on Congressional tax and spending plans for 2012 - but there is a growing sense of urgency about improving communication.
Three different issues are tangled together. The first is whether to clarify the Feds goal by agreeing on a clear inflation objective. Second is explaining how the Fed is likely to change policy in the future to reach that goal. Third is whether to use communication to ease policy now with, for example, a pledge to keep rates low until unemployment falls to 7 or 7.5 per cent.
A working group is attacking the problem from first principles with every option, including dramatic innovations such as setting a target for growth in nominal gross domestic product over time, up for discussion.
But progress is most likely on the second issue of guidance about future policy because changing economic conditions will mean the Feds August forecast of exceptionally low rates until mid-2013 goes out of date. Fed officials do not think that forecast has to be updated every meeting, nor necessarily in November, but sooner or later it will have to be changed.
Officials do not rule out simply changing the mid-2013 date in their statement but would prefer to provide more detailed guidance elsewhere, if they can agree on how. One option is to add a forecast of future interest rates to the inflation, growth and unemployment numbers that the Federal Open Market Committee publishes each quarter.
We have been discussing potential approaches for providing more information - perhaps through [economic projections] - regarding our longer-run objectives, the factors that influence our policy decisions, and our views on the likely evolution of monetary policy, said Janet Yellen, Fed vice chair, in a recent speech.
The biggest problem with a forecast of future interest rates is that the FOMC has 19 members at full strength. It will struggle to agree on a joint forecast and some officials are concerned that a wide range of individual forecasts of interest rates in 2014, for example, could confuse more than help.
Progress on an inflation objective or a strategy to ease via communications will be more difficult because Ben Bernanke, chairman, seeks consensus on changes to the Feds framework. That makes the deadlock between hawks who focus on the Feds inflation goal and doves who place greater weight on employment hard to break.
There is also reluctance to commit to any framework that would be inflexible if, for example, the eurozone situation got worse and even philosophical issues to wrestle with, such as whether the Fed could commit to policy in 2014, when the central bank may have a new chairman.
Of course, no communication policy will work unless the Fed can back its promises with action, and the next tool in its box is more asset purchases: QE3. More purchases might become appropriate if conditions called for significantly greater monetary accommodation, said Ms Yellen in her speech.
Fed policymakers are paying close attention to housing finance because lower interest rates only work if they feed through into cheaper mortgages.
If there were a QE3 the Fed would be likely to buy at least some more mortgage-backed securities - not least because it would be hard to buy a lot more Treasuries without hurting liquidity.
But so far QE3 is more of an option than a fixed intention. It could be triggered if the Fed expected inflation to stay below its 2 per cent goal in 2014 or if it did not foresee a steady decline in the unemployment rate. That is why clear communication is so important.
The Financial Times Limited 2011