Ben S. Bernanke, the Federal Reserve chairman, is waiting to see if the central bank needs new efforts to improve growth.
WASHINGTON — The scheduled meeting Tuesday of the Federal Reserve’s policy-making committee is unlikely to resolve the foremost question confronting the central bank: What happens next?
The Fed plans to complete by the end of June its current campaign to suppress long-term interest rates, keeping borrowing costs low for businesses and consumers. Some Fed officials see no reason for new measures, as the economy appears to be gaining strength. Others are eager for a new campaign, arguing that the recovery remains weak. But public remarks by Fed officials suggest a decision will not come before the committee’s next meeting in April.
First, there is a mystery to resolve: The Fed is not sure how fast the economy is growing. Some of the main measures, which produce a murky picture in the best of times, are now telling divergent stories. In particular, people do not appear to be buying enough goods and services to sustain the rising pace of job creation.
The Fed’s chairman, Ben S. Bernanke, testified before Congress last month that job growth would probably slow because the other measures tended to be more accurate. But he added that the reverse also could be true. And the Fed would like to know the answer before it decides whether it should promise new efforts to improve growth.
“In light of the somewhat different signals received recently from the labor market than from indicators of final demand and production, however,” Mr. Bernanke said, “it will be especially important to evaluate incoming information to assess the underlying pace of economic recovery.”
The significance of the pending decision is easy to overstate. The Fed is already engaged in an immense campaign to improve growth, which it has said it plans to continue for the next three years. The central bank is holding short-term interest rates near zero, and it has amassed a $2.5 trillion portfolio of Treasury securities and mortgage-backed securities to pull down long-term rates. Any new program probably would amount to only a modest increase in the scale of the overall effort.
While many members of the policy-making board, the Federal Open Market Committee, remain ambivalent about doing more, Mr. Bernanke and others on the committee have made clear they are not giving serious thought to doing less.
“I am comfortable with the current stance of monetary policy,” Sandra Pianalto, president of the Federal Reserve Bank of Cleveland, said earlier this month. “Doing more at this time could create too much inflation risk, and doing less could risk weakening an already slow expansion and causing an unwelcome disinflation.”
The current campaign to reduce borrowing costs, nicknamed Operation Twist, was begun in September. The Fed is buying $400 billion in long-term Treasury securities, increasing competition and in that way forcing other investors to accept lower interest rates. The Fed is also selling the same volume of short-term securities so that the purchases do not increase the size of its balance sheet.
The program extends the Fed’s earlier attacks on long-term rates through the purchase of more than $2 trillion in long-term Treasuries and mortgage-backed securities.
The Fed paused after each of the first two rounds of purchases, only to watch the economy falter. Mr. Bernanke has said that he is again inclined to pause and wait for evidence that the recovery is losing momentum. Many analysts have accordingly concluded a new round of purchases is unlikely.
But Vincent Reinhart, an economist at Morgan Stanley who served as the Fed’s chief monetary policy official during the early years of Mr. Bernanke’s tenure, said he still believed there was a 75 percent chance that the Fed would act by June.
In a note to clients last week, Mr. Reinhart said the recovery remained weak, inflation remained under control and the public remarks of Fed officials suggested to his practiced ear that they intended to act. And waiting any longer than June, he said, would inject the Fed into the presidential campaign.
“Economic slack persists and inflation is running below the Fed goal in its medium-term projection,” Mr. Reinhart wrote. “The dual shortfall from its mandate provides both justification and political cover for action.”
One possibility advocated by some committee members is a tailored effort to aid the housing market through increased purchases of mortgage securities.
Such a program would renew the concerns of critics, including some Fed officials and many Republican politicians, that its efforts to spur growth will impede its ability to respond with necessary speed and force when the pace of inflation begins to rise. Some argue that this could happen soon.
The Fed finances its purchases by creating money, but it has sought to address concerns that this could spur inflation by preventing the money from circulating. For the first two rounds of purchases, it paid the banks that sold securities to keep the money that they were paid on deposit with the Fed. During the current campaign, because it is buying some securities and selling others, the Fed is taking in exactly as much money as it is pumping out.
In any new campaign, the Fed also may consider a variant on those strategies, borrowing as much money as it spends by taking short-term loans called reverse repurchase agreements — in effect, a different way of paying banks to keep the money off the streets. The Wall Street Journal first reported this possibility.
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