Fed Stands Pat, But Signals Darker Days Ahead
Emily Brandon

The Fed takes no steps, but leaves door open for further easing

Federal Reserve Chairman Ben Bernanke showed the limits of monetary policy, leaving interest rates at their historic lows while scaling back economic projections for 2012 and beyond.

At his press conference following the end of a two-day meeting of the Fed's monetary policy committee, Bernanke said "We are doing our part," but added his recent refrains that action on the economy from other policymakers in Washington would be welcomed. "I hope there will be a range of actions that will complement and supplement the Federal Reserve's efforts."

The Federal Open Market Committee forecast a bumpy road ahead, with "continued weakness" in the labor market. Fed board members and bank presidents now forecast unemployment to be around 8.5 to 8.7 percent in 2012, up from the 7.8 to 8.2 range forecast as recently as June. Likewise, GDP growth projections for 2012 are now at 2.5 to 2.9 percent, down from 3.3 to 3.7 percent.

The agreement to maintain the status quo comes after two major policy moves: the announcement in August that it would maintain near-zero interest rates through mid-2013, and the September decision to extend the average maturity of bonds on its balance sheet, a move known as "Operation Twist."

This month's decision to stand pat was not unexpected; recent encouraging economic data, such as estimated 2.5 percent annual GDP growth in the third quarter, bought the Fed more time to consider its next steps. "Given the better tone of economic data the past several weeks, the economy wasn't screaming for additional measures like it was four or five weeks ago," says Greg McBride, senior financial analyst at Bankrate.com.

Still, Bernanke left the door wide open for further easing, and some analysts believe that another round of bond-buying by the Fed is a sure bet.

"The Fed is likely to expand its balance sheet again later this year or in early 2012, in another round of quantitative easing. The central bank could even move beyond purchasing Treasuries, to purchasing corporate debt and even equities," wrote Augustine Faucher, director of macroeconomics at Moody's Analytics, in an analysis of today's FOMC decision.

McBride agrees: "Unless the economy just surprises us all and gets up off of the mat, another round of quantitative easing is inevitable."

In a curious move, there was a shift in the internal dynamics of the Fed. In August and September, three so-called "inflation hawks" on the committee -- Dallas Fed President Richard Fisher, Minneapolis Fed President Narayana Kocherlakota, and Philadelphia Fed President Charles Plosser -- broke ranks with Bernanke and other committee members, choosing to dissent. Today, there was only one dissenter: the dovish Chicago Fed President Charles Evans, who supports an even more stimulative monetary policy. No doubt, the markets and Fed watchers will be dissecting this shift in the coming days.