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When the Fed's policymaking meeting ended Wednesday, the Fed released a statement, which says that "the economy has been expanding moderately." But it also pointed out that "the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed."
At 2 p.m. Eastern time, the Fed plans to release for the first time its policymakers' forecasts, although they will not be named. The forecasts are behind the thinking of the policy statement just released. They are are part of a Fed drive to make its policy more transparent and its communications with the public more clear and open. The more immediate goal is to assure consumers and investors that they'll be able to borrow cheaply well into the future.
The Fed's post-meeting announcement Wednesday, as expected, did not include any new Fed actions to try to lift the economy although the Fed said it does plan to continue its program of buying and selling securities in its portfolio so that the average maturity of those securities is longer-term. Most analysts expected Fed members would put off any new steps, such as more long-term bond purchases, to see whether the economy can extend the gains it has made in recent months without any help from the Fed.
This year's roster of new voting members on the Fed's policy panel suggests that fewer voters would likely have opposed further steps to boost the economy. Twice last year, Fed action to try to further lower long-term rates drew an unusual three dissenting votes out of 10. The committee is supposed to be made up of 12 members, which the seven board of governors of the Fed, the president of the New York Fed, Although dissents are not that out of the ordinary, discussion among policymaking committee members typically continues until there is unanimous agreement about what the Fed will decide to do.
Expectations were accurately focused on the likelihood that the Fed's policy stance would signal no rate increase probable until at least 2014. Tuesday's statement marks a shift in the Fed's stance. Since August, the Fed has said in policy statements that it planned to keep its benchmark rate at a record low until at least mid-2013, as long as the economy remained weak.
Here's why analysts expected the Fed to signal that most members see no increase before 2014:
On Wednesday, the Fed will use two charts to signify the thinking of each of its 17 policy committee members about rates.
One chart will illustrate how high each committee member thinks the Fed's benchmark rate will be at the end of 2012, 2013 and 2014.
A second chart will show how many members think the first rate increase will occur in each year from 2012 through 2016.
The charts won't identify any member by name.
Because the range of options extends as far as 2016, many analysts think the consensus view within the Fed is to avoid any rate increase before 2014 — the average of the possible options.
"Just seeing that the choice of a year for the first hike in the Fed funds rate goes all the way out to 2016 makes us think there are at least a few members of the committee who don't want to raise rates until the unemployment rate gets back down to 5 percent or 6 percent," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi.
"We guess there will be some hawks looking for a hike in 2013 and some doves thinking more like 2015," Rupkey said. "The weighted average is likely to be 2014."
Ward McCarthy, chief financial economist at Jeffries & Co., said he thinks the Fed's guidance will hint that the first rate increase could come in early 2014.
Others, such as economists at RBC Capital Markets, think the forecasts will suggest no change until late 2014.
Another essential clue to the Fed's plans will come in its economic projections. In its last projections in November, the Fed forecast that the economy would grow between 2.5% and 2.9% in 2012. That figure exceeds the forecasts of many private economists. Should the Fed reduce its expectations for growth, that could signal that it's prepared to do more for the economy.
The Fed has already taken numerous unorthodox steps to try to strengthen the economy. Since 2008, for example, it's kept its key rate, the federal funds rate, at a record low between zero and 0.25%. It's also bought long-term government bonds and mortgage-backed securities to try to reduce long-term rates and ease borrowing costs for consumers, homebuyers and businesses.
The idea behind the Fed's two rounds of bond buying was to drive down rates to embolden consumers and businesses to borrow and spend more. Lower yields on bonds also encourage investors to shift money into stocks, which can boost wealth and spur more spending.
Some Fed officials have resisted further bond buying for fear it would raise the risk of high inflation later. And many doubt it would help much since Treasury yields are already near historic lows. But Bernanke and other members have left the door open to further action if they think the economy needs it.
The path to such a move could be easier because three regional Fed bank presidents who dissented last year from further Fed action are no longer voting members of the committee. They're being replaced by three who are seen as more likely to back additional efforts to aid the economy.
If Chairman Ben Bernanke decides the economy needs more help from the Federal Reserve this year, he probably won't face as much resistance as he did last year.
Call it the changing of the guard.
As the Fed's policy committee meets for the first time this year, its roster of voting members is rotating slightly, as it does each year. And its new makeup suggests fewer members would oppose further steps to boost the economy.
Twice last year, Fed action to try to further lower long-term interest rates drew three dissenting votes out of 10. It was the most dissents in nearly 20 years. The "no" votes came from three regional Fed bank presidents who worried that additional moves to try to reduce long-term rates could fan inflation.
A fourth regional bank president twice dissented last year for the opposite reason: He wanted to go further to help the economy.
All four dissenters have lost their votes on the Fed's policymaking committee.
Replacing them are: Jeffrey Lacker, president of the Richmond regional Fed bank; John Williams of the San Francisco Fed; Sandra Pianalto of the Cleveland Fed; and Dennis Lockhart of the Atlanta Fed.
Should Bernanke push a new bond-buying program, only Lacker is seen as a probable dissent.
Lacker is viewed as the most "hawkish" of the new voting members, Williams the most "dovish." Hawks tend to be most concerned that super-low interest rates could ignite inflation. Doves put a higher priority on boosting the economy and reducing unemployment.
Pianalto and Lockhart are seen as centrists unlikely to break from the majority view.
In the past, the Fed has bought bonds to try to drive down long-term interest rates, encourage borrowing and spending and lift stock prices. The goal is to increase economic growth and hiring.
In December, Lacker told reporters he was "hard-pressed to see the rationale" for any further Fed efforts to increase growth.
Yet overall within the Fed this year, "I think there will be a little less militancy and a little more willingness to move forward with the chairman," predicts Diane Swonk, chief economist at Mesirow Financial.
That said, few economists expect the Fed to pursue more bond purchases soon, unless a European recession were to shrink U.S. economic growth and threaten the gains the economy has made in recent months.
"Bernanke will have the votes to pursue an easier credit policy if he needs to do so, but I just don't think the Fed will go further unless Europe goes bad," said David Wyss, former chief economist at Standard & Poor's. "Things in the U.S. economy are beginning to look better — not great, but better."
Bernanke already starts the year with a base of support within the Fed. The policy committee normally comprises 12 voting members:
— Seven Fed governors in Washington.
— The president of the New York Fed.
— Four of the 11 other regional bank presidents, who serve one-year rotating terms. This group is where dissents typically come from.
The seven governors, including the chairman, always have a vote. So does the New York Fed's president. All these members traditionally back the chairman.
On the Fed's board, two of the seven seats are vacant, even though President Barack Obama has nominated replacements for them: Jeremy Stein, a Harvard economics professor who is a Democrat, and Jerome Powell, a Treasury official in the George H.W. Bush administration who is a Republican.
Twinning a Democrat and a Republican was an Obama effort to win Senate confirmation for both. But Senate Republicans have threatened to hold up those nominations because of Obama's use of a recess appointment to install Richard Cordray as the first head of the Consumer Financial Protection Bureau.
Even if the board seats remain vacant, Bernanke will continue to command unanimous support on the board.
No announcements of further action to try to lift the economy through bond purchases are expected when the Fed's meeting ends Wednesday. Most analysts think Fed members want to put off such a step to see if the economy can extend the gains it's made in recent months.
Mark Zandi, chief economist at Moody's Analytics, said he thinks further bond buying is likely this year only if Europe's financial crisis destabilized U.S. financial markets and threatened the U.S. economy.
"Further bond buying will depend on two things: that the economy continues to struggle and that concerns about deflation rise," Zandi said.
Deflation is a prolonged drop in wages, prices and the value of assets like stocks and houses. The country last suffered serious deflation during the 1930s.
Zandi said he felt more bond buying isn't probable this year because he is forecasting the economy will perform better.
"My outlook is for an economy that is still soft but not struggling," Zandi said.
Hiring has picked up. Factories are busier. Gasoline prices are well off their highs. The depressed housing industry appears a little healthier. And stocks have reached their highest point since summer.
The stronger job growth has raised hopes more jobs will soon accelerate income and spending. The result could be what economists call a "virtuous cycle," in which businesses respond to growing demand by hiring even more.
Should that happen, the Fed might decide that further steps to energize the economy aren't necessary.
Vincent Reinhart, a former Fed economist who is chief U.S. economist at Morgan Stanley, says he thinks the Fed will launch another round of bond buying in the spring. That's because he thinks the economy will slow in the current January-March quarter compared with the final months of 2011.
Some think the Fed is most likely to buy more mortgage-backed securities. Doing so could help further reduce record-low mortgage rates and help boost home sales. The weak housing market has held back the economy.
Brian Bethune, an economics professor at Dartmouth College, expects another round of bond purchases in the second half of the year. Bethune thinks the Fed will use those purchases to counter the economic drag that could result if government spending cuts start next January. Those cuts are to take effect unless Congress resolves an impasse on extending tax cuts first passed during the Bush administration.
In addition to providing more guidance on rates, the Fed is weighing other changes in its communications. One could be a new statement to clarify its long-term targets for inflation and unemployment.
The Fed's inflation goal is thought to be between 1.7% and 2%. Its long-run target for unemployment is believed to be roughly between 5% and 6%.
Some private economists say the Fed would start a new bond-buying program only after it resolves an internal debate on its communications strategy — which could happen as soon as this week.
"They want to get the communications changes out there and get them understood before they do anything else," said Alan Levenson, chief economist at investment firm T. Rowe Price.
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