Fed Sets Stage Again for Stimulus

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By Deborah Solomon

The Federal Reserve indicated today it remains willing -- but not quite ready -- to take additional action to stimulate the economy.

In a statement that's becoming all too familiar, the Fed said the economy has slowed and it will "closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed."

In plain English, the Fed is priming the pump for further monetary stimulus -- such as another round of bond-buying -- if economic conditions continue to lag. And if history is any guide, the next few months should provide quick comfort to Fed doves pining for additional easing.

Two upcoming events -- the Fed's annual conference in Jackson Hole, Wyoming at the end of August and its September Federal Open Market Committee meeting -- have previously set the stage for big policy action.

In August 2010, Chairman Ben Bernanke lay down a marker in Jackson Hole when he indicated the Fed was considering additional easing. That speech -- followed by the FOMC's September statement that it was prepared to take action -- teed up the Fed's $600 billion bond-buying spree announced in November 2010.

Last August, the Fed pledged to keep its benchmark interest rate at a record low through at least mid-2013 and Bernanke said in his Jackson Hole remarks that the central bank has "a range of tools that could be used to provide additional monetary stimulus.” The Fed announced Operation Twist, its bond-buying program to flood the market with cheap credit, the following month.

This sets the stage for another late summer surprise, but whether the Fed takes more aggressive action depends on how sluggish the recovery seems. A key metric will come Friday when the Labor Department releases July payroll numbers. Economists expect the data to show employers added 100,000 jobs in July, compared with the 80,000 increase in June.

Last month, Bernanke mused about whether the economy is "stuck in the mud," and data so far are mixed. U.S. manufacturing unexpectedly contracted for a second month in July, according to Institute for Supply Management data released today, and second-quarter gross domestic product grew at the sluggish rate of 1.5 percent.

Still, even if Friday's jobs report indicates a lower unemployment rate and more job creation, the Fed is slowly finding itself boxed into a corner. Bernanke's ongoing comments about the slow pace of recovery and the Fed's willingness to act have set expectations, and the market now overwhelmingly expects action. Nearly 50 percent of economists recently surveyed by Bloomberg News expect the Fed to unveil a third round of quantitative easing at its Sept. 12-13 meeting.

What type of easing the Fed may choose remains to be seen, though most economists expect some type of housing- and government-bond buying program. If the past is a prologue, the markets won't have to wait long to figure out the Fed's next move.

(Deborah Solomon is a member of the Bloomberg View editorial board. Follow her on Twitter.)

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-0- Aug/01/2012 19:21 GMT