Fed wrestles with whether bolder action is needed to strengthen economy

WASHINGTON – Federal Reserve policymakers are wrestling with what additional steps - if any - should be taken to strengthen the plodding economy and drive down near double-digit unemployment.

Lots of lively debate is expected at Tuesday's meeting of the Fed's main policymaking group. But few expect any major programs to be unveiled. Instead, many will be looking to see if the Fed offers new clues about the timing of any new aid and what changes in the economy would trigger such a move. To give the Fed extra time for discussions, Tuesday's meeting is scheduled to start around 8 a.m. - earlier than when it has two-day sessions.

There are differing views on the policymaking group - the Federal Open Markets Committee - about what should be done. And some pressure is off after a few mildly positive economic reports showed the pace of layoffs has slowed, shoppers' appetites to spend has picked up and factory production is growing.

The reports have helped to ease concerns about the economy slipping back into a new recession, giving the Fed Chairman Ben Bernanke and his colleagues a little breathing room.

"We may be emerging from a soft patch," said Chris Rupkey, economist at the Bank of Tokyo-Mitsubishi, of the recent batch of encouraging reports. "This should allay the concerns of Fed officials."

Even without action, the Fed could send a stronger signal that it is prepared to act if it appears the economy is in danger of heading into another recession. Doing so would be aimed at boosting public and investor confidence that the Fed will come to the rescue to keep the economic recovery alive. That would reinforce a message Bernanke delivered in late August: the Fed still has some tools to help the economy and will use them if needed.

Investors appeared hopeful Monday that the Fed policymakers would offer some hints. The Dow Jones industrial average closed 145 points up and broader indexes closed higher, extending the September rally into its fourth week.

Policymakers' discussions on Tuesday - the last session before the Nov. 2 elections - are likely to focus on what specifically would trigger the Fed to take bolder action to help the economy, as well as what the action would be. Those discussions could tee-up a decision later this year, at the Fed's Nov. 2-3 meeting or at its last regularly scheduled session of the year on Dec. 14.

For his own part, Bernanke laid out some important markers in his Aug. 27 speech at an economics conference in Jackson Hole, Wyo. He said the Fed would take action if the economic outlook were to "deteriorate significantly" and if the country seemed headed for a bout of deflation - a destabilizing drop in wages, prices of goods and services, and the value of stocks, homes and other assets.

Bernanke didn't spell out what would constitute a significant deterioration, in terms of unemployment, economic growth or other key barometers. Those are some of the things he and his colleagues will be examining at Tuesday's session.

The Fed's meeting comes one day after the National Bureau of Economic Research, a group of academic economists, declared that the recession that began in December 2007 ended in June 2009. It marked the longest and most severe downturn since the Great Depression. The decision won't affect the Fed's deliberations on Tuesday. That's because the Fed makes policy decisions based on where it thinks the economy is heading, say six months from now. Not where it has been.

Economic growth slowed to a crawl in the second quarter - advancing at a pace of just 1.6 percent, compared with 3.7 percent growth in the first three months of the year. Growth in the July-September period is expected to be similarly weak. That raises the odds that the unemployment rate, already high at 9.6 percent, could climb even higher in the months ahead.

The risk is that this could trap the economy into another vicious circle: High unemployment could make consumers and businesses even more cautious in their spending, and that in turn weakens the economy further.

As to options for juicing up economic growth, Bernanke indicated a preference to launch a new program to buy large amounts of government debt. Such a move would be designed to lower already low rates on mortgages, corporate loans and other debt. The idea behind that is to entice people and businesses to spend more, which would strengthen the economy and lower unemployment.

In monetary policy circles, that's known as "quantitative easing." That's when the Fed - as it did during the recession and financial crises - takes unconventional steps to inject massive amounts of money into the economy. The Fed does this to lower interest rates and to help banks lend more. As a result, the Fed's balance sheet has ballooned to $2.3 trillion, nearly triple since before the crisis.

At its last meeting in August, the Fed, worried about the loss of economic momentum, took a small step to aid the recovery: It decided to use proceeds from its huge mortgage portfolio and buy government debt. The small amount involved helped nudge down mortgage rates. But it would take a bigger buying binge to really push rates push rates down.

But even that wouldn't guarantee that Americans would rush out and buy homes, cars and other things. The Fed's key interest rate is already at a record low near zero. It's been there since December 2008. And, the economy is still only plodding along.