The Federal Reserve is heading toward launching a new round of stimulus to buck up the weak economy, but stopped short of doing so right away.
The decision to make what amounted to a conditional promise of action came Wednesday at the end of the central bank's two-day policy meeting.
In an uncharacteristically strong statement, the Fed said it will "closely monitor" the economy and "will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions." Translation: The Fed will move if growth and employment don't pick up soon on their own.
As central bank messages go, this was a stark declaration and helped soften disappointment among investors that the Fed didn't take such action on Wednesday, as some had expected. The Dow Jones Industrial Average finished the day down 37.62 points, at 12971.06. Asian shares edged higher in early trading Thursday, with Japan up 0.6%.
With the move, the strategy of Fed Chairman Ben Bernanke is coming into clearer focus. Like a prosecutor preparing a difficult case for a skeptical jury, Mr. Bernanke is building a case that the economy needs more help and that the Fed can provide it without sparking other problems. But the Fed is burdened by doubts about the effectiveness of its actions and in its own forecasts for growth.
Attention now shifts to events in coming weeks, including the Labor Department's report Friday on July unemployment. The Fed didn't have those figures, which officials watch very closely, at its latest meeting.
Then, on Aug. 31, Mr. Bernanke returns to Jackson Hole, Wyo.—site of the central bank's annual retreat and a backdrop for past Fed turning points.
"We could have an event like we had back in August 2010 where he telegraphed [a second round of bond buying]," said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management. "That speech is going to be much more important than this statement."
On Thursday, the European Central Bank concludes its own meeting, a week after ECB President Mario Draghi raised expectations for action by declaring the bank would do "whatever it takes" to save the euro.
One tool the Fed has been considering: A program to purchase mortgage-backed securities with money the Fed essentially prints. That could further drive down mortgage rates. Rates on 30-year mortgages were around 3.75% in mid-July, according to Freddie Mac.
Refinancing activity has picked up in the past few weeks as rates have fallen, according to the Mortgage Bankers Association. Mr. Bernanke has listed other options to lawmakers, which remain possible but seem less likely to have a big impact.
The economy shows few signs of picking up. Macroeconomic Advisers LLC, a private forecasting firm, estimates it is growing at a rate of 1.8% in the third quarter. The economy expanded in the first half of the year at a rate of 1.7%, far slower than any Fed official predicted in January for the full year, according to the Fed's official forecasts.
The Fed said in its statement Wednesday that growth had "decelerated somewhat" during the first half of the year. Meanwhile the unemployment rate has stalled just above 8% and inflation is retreating.
A few more weeks of such data could lead Mr. Bernanke to believe he is ready to close his case. Some Fed officials felt action already was justified. Moving in August might have been more politically palatable for the Fed chairman, allowing him to take a controversial move before the presidential election season heats up. The Fed chief has said the central bank will seek to do what is best for the economy, regardless of political pressure.
Lawmakers put out dueling statements Wednesday, highlighting the partisan divide that awaits the central bank. GOP lawmaker Rep. Kevin Brady of Texas praised the Fed for its restraint, saying it "would have been a mistake for the FOMC to intervene further into the economy." Sen. Charles Schumer of New York, a top Senate Democrat, was reassured by the central bank's language that it plans to act soon. "The Fed should not be deterred from doing what's needed to reduce unemployment," he said.
Mr. Bernanke has taken a deliberate approach to launching programs since the worst of the financial crisis passed in 2009.
A $600 billion Treasury bond-buying program known as Quantitative Easing 2, or QE2, was signaled by Mr. Bernanke in August 2010 but not formally launched until November. That program was preceded by a strong official policy statement from a meeting a couple of months earlier.
On Sept. 12 and 13, the Fed convenes again, for a meeting that carries heightened expectations given Wednesday's statement...
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