Within the Fed, officials who skew toward concerns about unemployment believe that if overnight interest rates were at 3 percent, the central bank would not hesitate to deliver a big rate cut. Those officials are likely to advocate additional Fed support for a recovery at some risk of stalling. At the same time, others have been confident the recovery will accelerate and believe policy is loose enough.
Bernanke made clear in recent appearances that despite high unemployment the Fed isn’t ready to ease policy, in large part because inflation has climbed quickly this year, and a number of other officials have said the bar to further action is high.
But reports that manufacturing grew at its weakest pace in two years in July and that the economy expanded at less than a 1 percent annual rate in the first half of the year may change the tenor of the debate.
The Fed’s meeting on Tuesday is not expected to produce any immediate change in policy. The U.S. central bank completed a second installment of bond buying, or quantitative easing, worth $600 billion on June 30 and policymakers have said they want to see how the economy evolves before taking any further action.
However, a series of weak economic data has thrown cold water on hopes for a big pickup in growth in the second half of the year and put analysts on watch for signs that could indicate another recession is brewing.
The Fed revised down its growth forecasts in each of its last two quarterly projections, but even so they look on the high side given the recent run of data, and it is likely to register its disappointment in its post-meeting statement.
While Bernanke is a champion of Fed openness, he may be happy to have three more weeks before he speaks publicly. Some analysts see his scheduled August 26 speech at the annual Fed conference at Jackson Hole, Wyoming, as an ideal setting to flesh out details of the bank’s thinking.
After additional information about consumer and business spending and sentiment, as well as inflation, the Fed may be in a better position to signal whether it is ready to take fresh steps to spur growth. He used a speech at Jackson Hole last year to pave the way for the Fed’s second round of large-scale bond buying, dubbed QE2, to revitalize the flagging recovery.
For the first time since March, officials will not update their forecasts this week or hold a news conference to put meat on the bones of their terse post-meeting statement.
