Divided Fed set for policy meeting

Federal Reserve policymakers will gather Tuesday amid deep divisions over the central bank's policies and how they are communicated, and as they update their forecasts for the economy. Most observers say there is little chance the Fed will unveil additional tools when it wraps up a two-day meeting Wednesday. The Fed has provided exceptional support to boost the US economy out of recession, including keeping interest rates ultra-low between zero and 0.25 percent for nearly three years. At the September meeting, its conventional arsenal limited, the policy-setting Federal Open Market Committee said it would shift $400 billion in shorter-term bond holdings to longer-term ones, with the aim of lowering long-term interest rates. But this time, with growth in the world's largest economy picking up from a near-stall in the first half of the year, the FOMC is expected to stand pat, turning its attention to new forecasts for gross domestic product (GDP) growth, unemployment and inflation. Analysts also anticipate the policymakers will discuss Fed chairman Ben Bernanke's post-FOMC news conference, only the third in Fed history, after those in April and June, as the independent central bank seeks to improve communications with the public. As for potential changes in communications, the Fed could decide to express an explicit inflation or nominal gross domestic product (GDP) growth target, said Ryan Sweet at Moody's Analytics. "The other option is assigning specific economic conditions to its forward monetary policy guidance, a step for which there is growing support," he said. "Both changes would be significant and would have to be implemented with care not to muddle the Fed's objectives or damage its credibility." The new Fed economic assessments are expected to reflect sharp downward revisions to the 2011, 2012 and 2013 forecasts released in June, and, for the first time, include numbers for 2014. The International Monetary Fund in September estimated the US economy would grow at an annual 1.5 percent this year and 1.8 percent in 2012, far too weak a pace to bring down high unemployment bedeviling the US for more than two years. The Fed's latest numbers also may signal how the central bank sees conditions for the economy to continue growing, albeit slowly. For the economists at Nomura brokerage, the FOMC "will update its forecasts and likely reaffirm plans to extend the average maturity of securities holdings and to reinvest principal payments of agency debt/MBS (mortgage-backed securities)." The FOMC announced on September 21 that it would reinvest some debt holdings into mortgage-backed securities to aid the depressed housing sector. But the decision was not unanimous and, according to the minutes of the meeting, one dissenter said the action "would not benefit housing markets." Since the last FOMC meeting, several members have said they want the Fed to do more to stimulate growth, including using another massive round of asset purchases, known as quantitative easing, if the economic outlook deteriorates. They argue current inflation poses no real risk to the economy despite its higher levels, and so stronger steps are justified to reduce unemployment more quickly, to fulfill the Fed's dual mandate of full employment and price stability. But the government's first estimate of third-quarter GDP growth Thursday, showing the economy expanded at 2.5 percent, nearly double that of the prior quarter, may cost their arguments traction, even though growth was only modest. Barclays Capital analysts said they expected the FOMC "to explore ways to improve transparency further and to discuss further policy easing options" if needed. The Fed panel also may debate a proposal from Chicago Fed chief Charles Evans, a voting FOMC member, who said in a speech this month that the central bank should spell out the conditions affecting its dual-mandate responsibilities. "We should consider committing to keep short-term rates at zero until either the unemployment rate goes below seven percent or the outlook for inflation over the medium term goes above three percent," Evans said. He acknowledged some may find that "risky." "But these are not ordinary times -- we are in the aftermath of a financial crisis with massive output gaps, with stubborn debt overhangs and high degrees of household and business caution that are weighing on economic activity."