By Steven K. Beckner

(MNI) – Federal Reserve Chairman Ben Bernanke has plenty of support
for continuing an accommodative policy for the forseeable future, both
among his fellow Board members and among the Bank presidents. Indeed,
some officials would contend that monetary policy is really not all that
accommodative under the circumstances.

Evans said that, even if it was only charged with maintaining price
stability, the fact that the Fed is “undershooting” its inflation target
“dictates a highly accommodative policy.” Arguing that “substantial
accommodation” is warranted, he said the so-called Taylor Rule would
call for the federal funds rate to be cut to minus 4% under current
circumstances were it possible.

Of course, views could change if the pace of the expansion alters
in either direction. About this there is greater-than-usual uncertainty,
owing in part to unknowns about fiscal and regulatory policy, which is
in great ferment in the now divided federal government.

But for now, most officials say they expect, if anything, only
modest improvement from last year’s economic growth and consequently
only gradual reductions in unemployment and continued “subdued”
inflation.

In its last quarterly forecast, prepared at the Nov. 3 meeting,
FOMC members projected real GDP would pick up to 3.0-3.6% in 2011 from
2.4-2.5% in 2010. They anticipated that unemployment would decline to
8.9-9.1% from 9.5-9.7%. And they forecast that core PCE inflation would
run 0.9-1.6% — compared to 1.0-1.1% in 2010. They projected somewhat
faster growth in 2012, but saw unemployment staying high in the 7.7-8.2%
range.

The “beige book” survey conducted ahead of next week’s meeting
gives little cause for great cheer about a much improved outlook. It
found that “economic activity continued to expand moderately” through
Jan. 3, with improvement in only 4 of the 12 districts. Better
manufacturing and consumer spending offset weakness in housing.

The beige book reported that “labor markets appeared to be firming
somewhat in most Districts, as some modest hiring beyond replacement was
said to have occurred and/or was planned in a variety of sectors,” but
“upward pressure on wages was reportedly very limited.”

Fed concerns about disinflation giving way to deflation have
diminished considerably, but worries about unemployment have remained
intense. Indeed, the maximum employment side of the Fed’s dual mandate
has lately gotten a lot more attention in officials’ comments than the
price stability side.

In his Jan. 7 testimony before the Senate Budget Committee,
Bernanke said, “Although recent indicators of spending and production
have generally been encouraging, conditions in the labor market have
improved only modestly at best.” He was testifying on a morning when the
Labor Department reported a drop in the unemployment rate from 9.8% to
9.4% that was laid largely to a decline in the labor force and a
weaker-than-expected 103,000 rise in non-farm payrolls.

“Notwithstanding these hopeful signs, with output growth likely to
be moderate in the next few quarters and employers reportedly still
reluctant to add to payrolls, considerable time likely will be required
before the unemployment rate has returned to a more normal level,”
Bernanke said. “At this rate of improvement, it could take four to five
more years for the job market to normalize fully,” he said.

Bernanke’s top lieutenants have similar views.

While maintaining an easy money stance and continuing to expand the
balance sheet, Bernanke and others have taken pains to reassure
financial markets and the public that they have the tools and the will
to tighten monetary policy in a timely way to head off higher inflation.

The FOMC has been studying how best to communicate its policy,
including possible press conferences by the Chairman, and it is possible
some changes could be considered or even adopted at the upcoming
meeting.

But, as yet, there is no sense from Bernanke or most of his
colleagues that they are in any hurry whatsoever to head toward the
exit.

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** Market News International **

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