“We are not going to let that happen” he says after a speech in Houston. The housing market will not be a driver of the economy for years and the economy will take quite some time to recover, he says.

After repricing after the US data this morning, markets have fallen into a quiet consolidation,  awaiting more economic data tomorrow and Friday. EUR/USD is at 1.2800, USD/JPY at 84.45 and AUD at 0.9080.

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• Fed alone cannot boost growth
• US economy restrained by high household debt, uncertainty, lack of confidence
• Repeats Fed risks “pushing on a string”
• Fed committed to low rates until confident of economic recovery

In a Reuters interview, Philly Fed president Charles Plosser says the Fed should not ease more in an attempt to solve the unemployment problem. If real deflation risks arose, he would entertain the idea. Plosser sees no double-dip, just a soft patch in the recovery. He sees growth of 3% this year and 3.5% next year.

Plosser says there is nothing the Fed can do to affect the unemployment rate through year end and downplays the utility of reinvesting the proceeds of its MBS portfolio. He sees the move having no measurable impact…

Markets are taking the comments in stride with the S&P still up 2.7%.

• Members generally believed outlook softer than expected saw growing downside risks to growth, inflation
• None saw appreciable deflation risk
• Treasuries preferable to MBS for reinvestment unless market conditions change
• Members say employment, inflation falling short of desirable levels for longer than had been anticipated
• Economy operating further below where potential than previously thought

Details are here.

At first glance, it appears that the vast majority of the members are on the same page and that differences are just a matter of degree.

Here is the staff economic forecast the members are working off:

n the economic forecast prepared for the August FOMC meeting, the staff lowered its projection for the increase in real economic activity during the second half of 2010 but continued to anticipate a moderate strengthening of the expansion in 2011. The softer tone of incoming economic data suggested that the pace of the expansion would be slower over the near term than previously projected. Financial conditions, however, became somewhat more supportive of economic growth. Interest rates on Treasury securities, corporate bonds, and mortgages moved down further over the intermeeting period; the dollar reversed its April to June appreciation; and equity prices edged higher. Over the medium term, the recovery in economic activity was expected to receive support from accommodative monetary policy, further improvement in financial conditions, and greater household and business confidence. Over the forecast period, the increase in real GDP was projected to be sufficient to slowly reduce economic slack, although resource slack was still anticipated to remain quite elevated at the end of 2011. Read more

These should be the most interesting FOMC minutes in a long time based on the Wall Street Journal article several weeks ago which highlighted the unusually large number of participants (7 of 17) who took issue with the Fed dipping its toe back into the quantitative easing waters.

From a policy perspective, Bernanke laid out several alternatives at Jackson Hole, so that will be the most likely course for the Fed to follow going forward, but from a soap opera perspective, today’s minutes will be the most interesting in terms of the internal debates taking place within the FOMC in some time.

Bernanke was able to herd the cats last time (only Hoenig dissented) but we’ll have to read the minutes closely to see if there is a wider rift (or rifts) developing within the Federal Reserve Board.

If it turns out that there is a hawkish wing of the FOMC coalescing to oppose QE, that is a potential dollar plus from a yield perspective but a negative from an asset market perspective. Stocks won’t like it.

St. Louis Fed president Bullard, the man who warned of a potential Japanese-style deflation weeks before the Fed unveiled QE-lite, says the government should leave the mortgage market to the private sector as much as possible.

That would be a huge shift as virtually all the mortgages granted in the wake of the collapse of the credit bubble in the US have gone through Freddie and Fannie. In that time, the Fed also purchased over a one-trillion dollars in mortgage-backed securities.

The fact that Bernanke talked about the possibility of more quantitative ease as conditional on a significant weakening in the economic outlook has given the dollar a boost, as the dust settles. Many had expected an immediate signal that the QE Two was leaving the wharf but Bernanke still has her lashed tight (though with a mate standing by to cast off…)

EUR/USD is now at 1.2690, USD/JPY at 84.90 (after a sharp dip to 84.37) and yields are a good bit firmer with 10s yielding 2.56%.

• Especially if outlook weakens significantly
• Deflation not a big risk but Fed will “resist” downward pressures on price stability
• Fed has not yet agreed specific criteria or triggers for further action
• Fed still has tools at its disposal

The dollar is strengthening against the EUR and equities are falling as Bernanke stopped well-short of signaling any panic move toward additional quantitative ease.

Here is the full text of Bernanke’s remarks.

He sees a soft patch in the economy but does not expect it to transform into a double dip.

He calls policy extremely accommodative but acknowledges that the committee may do “a little more” on the quantitative easing front.

Don’t expect any bombshell announcements from the Fed chair at tomorrow’s KC Fed symposium at Jackson Hole, Wyoming. The Journal clearly illustrated this week that the FOMC is unusually divided on the need for further accommodation (or the impact, if any) and while recent data has only worsened, don’t expect Bernanke to do much more than reiterate the options the Fed has at its disposal that he outlined before Congress last month.

The buck could get a lift out of the speech, sort of a relief trade, if you will, by him not tipping his hand on further quantitative ease ahead.

If he arrives in a helicopter though, all bets are off…

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