No major Fed moves expected as economy shows gains

[November 01, 2011]  WASHINGTON (AP) -- Let's wait and see.

That's likely to be the message from the Federal Reserve on Wednesday, when its two-day policy meeting ends. Few expect any bold new steps to be announced.

Fed policymakers likely want to gauge the impact of action they've taken recently to keep interest rates low. The Fed has breathing room because the economy and stock markets have strengthened enough to allay fears of another recession.

After their September meeting, the policymakers said they would shuffle the Fed's investment portfolio to try to further reduce long-term interest rates. And in their previous meeting in August, they had said they plan to keep short-term rates near zero until at least mid-2013 unless the economy improved.

"They know they are running out of tools, so they don't want to employ another one unless they have to," said David Wyss, former chief economist at Standard & Poor's.

At its last meeting, the Fed left open the possibility of taking additional action to try to help the economy. One option is to further explain the steps it has already taken and their purposes. Another would be to launch a third program of bond purchases.

But the Fed remains deeply divided over what, if any, action to take, which is another reason economists don't expect any major announcements this week.

The actions taken in August and September were adopted on 7-3 votes, the most dissents in nearly 20 years.

Three regional bank presidents -- Richard Fisher of Dallas, Charles Plosser of Philadelphia and Narayana Kocherlakota of Minneapolis -- all voted no. They have expressed concerns that the Fed's policies could lead to high inflation later.

On the other hand, four policymakers are worried that the Fed might not be doing enough. Vice Chair Janet Yellen, Governor Daniel Tarullo, Chicago Fed President Charles Evans and New York Fed President William Dudley have said the economy is at risk and might need more support.

"I have never seen the Fed more deeply divided than it is at this moment," said David Jones, head of DMJ Advisors and the author of books on the Fed.

At its meeting in September, the Fed stopped short of expanding its portfolio of investments. Instead, it opted to shuffle $400 billion of its investments to try to lower long-term rates.

But two officials pushed for bolder action, according to minutes of the meeting. The members discussed more bond-buying. Some said it should remain an option.

A brighter outlook for the economy has given the Fed more room to wait. The economy grew at an annual rate of 2.5 percent in the July-September period -- the best quarterly performance in a year.

That's strong enough to show that the economy isn't about to slide into recession. Still, growth would have to be nearly twice as high -- consistently -- to make a major dent in the unemployment rate, which has been stuck at 9.1 percent for three straight months.

Stocks have rallied of late. Even after a drop of nearly 2.5 percent Monday, the Standard & Poor's 500 stock index in October notched its best one-month showing since December 1991.

European leaders have also announced a debt agreement that could help prevent a financial catastrophe on the continent. Still, even if it does, many analysts don't think Europe can avoid another recession.

Many economists think the Fed will hold off on new action until its December meeting or early next year. The next step could be further clarity on its interest-rate policy.

Evans has proposed that the Fed set benchmarks for raising rates. For example, it could agree not to raise short-term rates until unemployment fell below 7 percent or the outlook for inflation exceeded 3 percent. The unemployment rate has hovered around 9 percent for more than two years, and the Fed's inflation outlook is under 2 percent.

Yellen, who heads a Fed panel that is examining ways to improve the central bank's communications, says the idea should be examined. But she cautioned that such benchmarks could confuse investors.

She has suggested that the Fed could add further guidance when it provides its economic forecasts four times a year. The forecast offers estimates for growth, unemployment and inflation. It does not forecast interest rates.

Mark Zandi, chief economist at Moody's Analytics, said that adding a Fed forecast on the federal funds rate, its main policy lever, would reassure investors about when it might move interest rates.

"They have given investors more clarity about the timing of future rates, but including an actual forecast of when rates might change would help bring rates down further," Zandi said.

[Associated Press; By MARTIN CRUTSINGER]

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