By Steven K. Beckner

(MNI) – The Federal Reserve’s mid-year Federal Open Market
Committee meeting is nearly at hand, and while it can hardly be called a
non-event, it is very unlikely to result in any movement away from the
Fed’s highly stimulative monetary policy.

Earlier this year, some Fed watchers once thought that surely by
now the FOMC would be ready to start tightening monetary policy, but
clearly that is not the case. Tightening remains off in the
indeterminate future.

Financial markets would be shocked if the FOMC were to begin the
tightening process at next week’s two-day meeting.

It would be surprising if the FOMC were even to change its policy
guidance to hint at coming rate hikes, much less actually raise the
federal funds rate from near zero, where it’s been since December 2008.

Once again, the FOMC is likely to reiterate its notorious
expectation that the federal funds rate will stay “exceptionally
low … for an extended period.”

Fed Chairman Ben Bernanke has had ample opportunities recently to
prepare the financial markets for a policy shift had he wanted to use
them. He chose not to do so.

On Monday of last week, Bernanke said the Fed cannot wait until the
economy returns to full employment before it begins to raise interest
rates, but left in doubt how long it will leave the key federal funds
rate near zero. He said the economy is expanding and the recovery is on
a sustainable path. But he called the growth pace “modest.”

What’s more, Bernanke said the unemployment rate is likely to stay
high for some time because the recovery won’t be fast enough to reduce
joblessness quickly. Bernanke also said the banking system, while
improved, is not yet back to health. And he said the Fed is watching the
European debt crisis “carefully.”

Two days later, in testimony before the House Budget Committee,
Bernanke called the economy “fragile” and said the kind of growth it is
apt to experience is likely to bring the unemployment rate down “only
slowly.” And he said “significant restraints on the pace of the recovery
remain,” among them “strained credit conditions.”

In that climate, Bernanke said inflation is apt to stay “subdued.”
The Fed chief also again cast a wary eye on the European debt crisis,
saying that the Fed “will remain highly attentive to developments abroad
and to their potential effects on the U.S. economy.”

This past Wednesday, Bernanke said he didn’t want to talk about
monetary policy as he commented on the Squam Lake Group’s report on
banking regulatory reform. But he hinted at his ongoing concern about
credit constraints on economic growth when he commented that “reasonable
transition periods will be necessary to allow banks to meet these more
demanding standards without unduly constricting credit or endangering
the recovery.”

Nor have other Fed officials evinced any particular eagerness to
begin removing monetary stimulus.

Fed Governor Elizabeth Duke pointed last week to “the contraction
in consumer credit,” blaming it on both “diminished supply and weakened
demand.”

St. Louis Fed President James Bullard, an FOMC voter, said he is no
longer concerned about deflation risks and said he does not expect
either the European debt crisis or a slowdown in Asia to derail global
recovery. He predicted the U.S. economy will achieve “complete recovery”
in the third quarter.

But Bullard said it will take longer for unemployment to fall. Once
the economy has surpassed its previous output peak, Bullard said it will
time to work on reducing the federal budget deficit, but he did not say
that will be the time to start removing monetary stimulus.

Brian Sack, head of the New York Fed’s open market trading desk,
remarked, “no one has suggested the appropriate timing (for rate hikes)
is imminent.”

And Glenn Rudebusch, a top aide to San Francisco Fed President and
soon-to-be Fed Vice Chairman Janet Yellen said exiting from the
accommodation “will take a significant period of time,” with rate hikes
not coming until early 2012, based on a policy “rule of thumb” followed
by the Fed in the past.

Philadelphia Federal Reserve Bank President Charles Plosser, who
will be an FOMC voter next year when the toughest rate decisions are
likely to be made, reiterated his view that “we should begin to sell
some of our non-treasury assets sooner rather than later.” But he was
more indefinite about rates.

“Depending on the outlook for economic growth and inflation, the
time will come when the FOMC will need to raise the federal funds rate
target,” said Plosser, adding, “Even if the target was increased to 1%,
policy would remain very accommodative.”

But unlike Kansas City Fed President Thomas Hoenig, who has been
saying the Fed should begin raising the funds rate “soon” toward 1%,
Plosser was more vague.

“Given the lags in the effects of monetary policy on the economy,
we will need to begin withdrawing stimulus and raising interest rates
well before the unemployment rate has fallen to acceptable levels,” he
said. “We need to be forward looking in setting monetary policy to
achieve our long-run goals of price stability and maximum sustainable
economic growth.”

Other 2011 FOMC voters have been even more ambivalent about hiking
rates.

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** Market News International **

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