Coming soon to a central bank near you . . . (AFP PHOTO/KAREN BLEIER)
Coming soon to a central bank near you . . . (KAREN BLEIER/AFP)

The leaders of the Federal Reserve will come from far and wide again this week to sit down at a big mahogany table and decide what to do about the nation's monetary policy.

The answer will almost certainly be: Nothing.

They've been buying $85 billion worth of bonds every month for more than a year. They will likely continue. They've had short-term interest rates near zero for nearly five years. That too will continue. They have been saying that they expect to keep interest rates near zero until the unemployment rate has fallen to 6.5 percent (and officials have hinted that they really would expect to wait until it is still lower than that).

This is all quite a contrast with when they met just six weeks ago. Then, they were deciding whether to begin tapering those $85 billion in bond purchases, as most every Wall Street Fed watcher had expected, and offering the first concrete step toward ending the era of unlimited money-printing. It was a close call, but they decided not to taper, concluding that the economic data was tepid enough and the fiscal headwinds facing the economy were powerful enough that it would be better to wait a bit to see how things shake out.

They are surely glad they did so. Since then, the government has shut down for 16 days, the nation flirted with a debt default, and the jobs picture has grown, er, tepider. The open question is not whether the Fed will taper bond buying this week, and even a December taper would require more evidence than we've seen so far that "substantial improvement" in the labor market is occurring, to use the preferred Fedspeak. Until the millisecond the no-taper news was announced Sept. 17, people thought the Fed was set to begin pulling back. Now, it looks like it could well be spring before the central bank pulls the trigger. (Here's more on the three key reasons behind the shift)

Here's how to think about what the Fed has been up to the last few months, a sequence that has discombobulated markets. There has been a long-simmering battle within the central bank over this basic question: Should they still be focused all-out on fixing the economic damage wrought by the last crisis? Or should they worry more about risks building in the financial system that could contribute to a future crisis?

On one side are the worriers: They include outright monetary hawks like Esther George of the Kansas City Fed and Richard Fisher of the Dallas Fed. They include a contingent at the Washington-based board of governors including governors Jeremy Stein and Jay Powell and former governor Elizabeth Duke, who have voted in favor of the QE3 program but with some reluctance.

This contingent looks around and sees all kinds of ugly side effects of the Fed's easy money policies. There is "reaching for yield" in which investors take on inappropriate risks in order to try to goose their returns. There is a shortage of Treasury bonds, used as ultra-safe collateral for a wide range of transactions. There are possible bubbles in everything from Iowa farmland to Indonesian government bonds.

The other contingent has included monetary doves like Charles Evans, Eric Rosengren, and Narayana Kocherlakota of the Chicago, Boston, and Minneapolis Fed banks. It has included, recently at least, James Bullard of St. Louis, who is particularly exercised about the Fed consistently undershooting its 2 percent inflation target. And it includes Janet Yellen, the president's nominee to succeed Ben Bernanke as chair.

This contingent looks around and sees an economy that still isn't gathering any real steam, held back by tightening fiscal policy. They see too-high unemployment as the paramount problem facing the economy, at a time when inflation is too low. Their job is to try to find ways to address this.

They may concede that the financial market disruptions the skeptics point to are worth watching, but at this juncture don't see enough evidence of bubbles or other problems to justify backing away from easing. If investors are plowing into riskier investments, well, that's a big part of the point of QE (it's called the portfolio balance channel: When the Fed takes treasury bonds off the market, investors have to plow into riskier assets, driving up the stock and bond markets).

Ben Bernanke's job as chairman has been to navigate these two competing views, to decide which set of ideas is more compelling at any given time and steer the policy committee toward that answer.

In the spring and early summer, it was the hand-wringers who had the upper hand. The economy was doing better and a number of bond markets were looking bubbly. That's when the Fed started signaling that tapering may be nigh.

In late summer and fall, the momentum has shifted. Economic data has been mixed to negative. The sell-off in bond markets took away some of the froth and made prices of bonds look more in line with reasonable forecasts of the future of policy. And there have been slight shifts in personnel, for example Duke retiring at the end of August and Yellen becoming the nominee to be the next chair.

At this week's meeting, the thing to watch for is any hint in the Fed's policy statement of how decisive this shift is. What would it take for the taper to finally be back on? Is one or two good months of jobs data enough? Or as the start date of the Yellen Fed approaches, is this a central bank that is content to keep the money pumping in hopes of getting growth on track?

Wednesday afternoon, we get to scrutinize the subtle language of their policy statement to try to figure out which contingent will have the upper hand.