The biggest hint yet the Fed will act

August 22, 2012

Many observers expect the Federal Open Market Committee (FOMC) to announce another round of quantitative easing, or other stimulative measures, following its meeting on September 12th and 13th. The best evidence for this speculation yet comes in the form of minutes from its last meeting, at the end of July, which were released to the public today. Here's the key paragraph:

Many members expected that at the end of 2014, the unemployment rate would still be well above their estimates of its longer-term normal rate and that inflation would be at or below the Committee's longer-run objective of 2 percent. A number of them indicated that additional accommodation could help foster a more rapid improvement in labor market conditions in an environment in which price pressures were likely to be subdued. Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.

Elsewhere in the minutes, members discuss possible forms of stimulus, including new asset buys (or quantitative easing), extending the period for which the Fed promises to keep interest rates low, and lowering the interest rate paid to banks for reserves kept in the Fed. The latter policy, while untraditional, has worked wonders in Sweden.

Now, despite these options being discussed, the last meeting ended without further action. So it's possible that these options will be discussed again and the committee will again decide to defer action. The next key sign will be Ben Bernanke's speech at the Jackson Hole, Wy. central bankers' summit on August 31st. Historically, such speeches have been used by Fed chairs to signal coming policy changes.

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Ezra Klein | August 22, 2012