By Steven K. Beckner

WASHINGTON (MNI) – There’s only so much even an activist central
bank like the Federal Reserve can do to boost a struggling economy, as
Fed Chairman Ben Bernanke has readily conceded.

And so it is no surprise that, after two days of meetings, the
Fed’s policymaking Federal Open Market Committee has decided to take a
pause of indeterminate length in wake of the aggressive monetary
stimulus measures it adopted at its mid-September meeting.

Though declining to inject even more money into the economy, the
Fed is keeping an open throttle on money and credit creation.

Just as it did following its July 20 meeting, when it extended
“Operation Twist,” the FOMC decided to take a wait-and-see approach just
over a month after launching a third round of bond buying to lower
long-term interest rates and further delaying short-term rate hikes.

But that does not necessarily mean the Fed is finished with its
efforts to accelerate subpar economic growth. The FOMC clearly left the
door open for more “quantitative easing” in its Wednesday afternoon
policy announcement.

Calling unemployment “elevated” and predicting inflation will stay
low, the FOMC reaffirmed all aspects of its “highly accommodative”
monetary policy stance. It will:

— continue to buy $40 billion of mortgage backed securities per
month until it sees “substantial” labor market improvement (“QE3″);

— continue its $45 billion per month “Maturity Extension Program”
(Operation Twist) through the end of the year;

— continue reinvesting principal payments from its holdings of
agency debt and agency MBS in agency MBS;

— hold the federal funds rate within a zero to 25 basis point
target range “at least through mid-2015,” and

— hold interest rates down “for a considerable time after the
economic recovery strengthens.”

As it did on Sept. 13, the FOMC left the door open for more
quantitative easing.

“If the outlook for the labor market does not improve
substantially, the Committee will continue its purchases of agency
mortgage-backed securities, undertake additional asset purchases, and
employ its other policy tools as appropriate until such improvement is
achieved in a context of price stability,” it said.

“In determining the size, pace, and composition of its asset
purchases, the Committee will, as always, take appropriate account of
the likely efficacy and costs of such purchases,” it added.

There were a few nuances in the way the Fed characterized economic
conditions, but not enough, obviously to change the course of monetary
policy.

The Oct. 24 statement begins much as did the Sept. 13 one:
“Information received since the Federal Open Market Committee met (last
time) suggests that economic activity has continued to expand at a
moderate pace in recent months. Growth in employment has been slow, and
the unemployment rate remains elevated.”

In a small departure, the statement then notes that “household
spending has advanced a bit more quickly, but growth in business fixed
investment has slowed.”

As in September, the latest statement observes that “the housing
sector has shown some further signs of improvement, albeit from a
depressed level.”

In another departure, the Fed notes that “inflation recently picked
up somewhat, reflecting higher energy prices.” But the statement
otherwise preserves the FOMC’s sanguine attitude toward inflation in the
near-term.

“Longer-term inflation expectations have remained stable,” it
reiterates, and the FOMC “anticipates that inflation over the medium
term likely would run at or below its 2% objective.”

The statement reiterates that “strains in global financial markets
continue to pose significant downside risks to the economic outlook.”

The statement makes no concern of the budgetary stand-off known as
the “fiscal cliff,” but it is known to be a matter of great concern for
monetary policymakers.

Once again, only Richmond Federal Reserve Bank President Jeffrey
Lacker dissented, but for slightly different reasons.

Lacker repeated his opposition to additional asset purchases. But
this time instead of arguing for the omission of the “mid-2015″ time
period for keeping the funds rate near zero, he “disagreed with the
description of the time period over which a highly accommodative stance
of monetary policy will remain appropriate and exceptionally low levels
for the federal funds rate are likely to be warranted.”

Although he was the sole dissenter, Lacker is not alone in opposing
the use of a calendar date for defining the zero rate period. Many other
FOMC members would also like to move from a calendar date to some kind
of “reaction function,” possibly a numerical threshold, but the FOMC has
been unable thus far to come to a consensus on an alternative approach.

The FOMC will meet again Dec. 12-13, at which time participants
will compile new quarterly, three-year economic projections and funds
rate forecasts. Bernanke will hold another press conference at that
meeting.

By then, the expiration of Operation Twist will be looming, as will
the so-called “fiscal cliff” of automatic tax hikes and spending cuts.
At that time the FOMC will have to decide whether or not it needs to
expand QE3.

** MNI Washington Bureau: 202-371-2121 **

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