The Federal Reserve appears increasingly likely to embark on another round of monetary stimulus if the economy continues to lose momentum.
The central bank on Tuesday took the unprecedented step of promising it would keep interest rates near zero for a set period of time -- at least until 2013 -- and said it was exploring other options to support a flagging recovery.
If economic growth slows further and the 9.1 percent jobless rate remains elevated, Fed Chairman Ben Bernanke seems likely to act despite the objections of some of his colleagues.
We now see a greater-than-even chance that (the Fed) will resume quantitative easing later this year or in early 2012, Goldman Sachs analysts said in a research note. The committee would probably ease policy further if its economic forecast converged to our own, more downbeat view.
The central bank's June forecasts for economic growth between 2.7 percent and 2.9 percent are already looking overly optimistic, particularly after data showing the first half's performance had been much weaker than first thought.
Economists in a Reuters poll this week are now, on median, looking for just a 1.7 percent rise in gross domestic product for 2011.
What a third round of policy easing might involve is still unclear. The most obvious would be to resume asset purchases, despite the controversial nature of the last round, if only because it is already familiar ground.
Any such action would come with argument -- even the low-rates pledge on Tuesday elicited three dissenting votes, the most in almost 20 years.
SURPRISE VALUE WANING
Some analysts are still hoping Fed Chairman Ben Bernanke has a trick or two left up his sleeve - even if they fear his sleights of hand offer diminishing returns these days.
A quick look at the markets was a case in point.
The Fed's pledge to keep interest rates low until at least mid-2013, plus announcement that it was also exploring other policy options, led to a hefty rebound in stocks on Tuesday.
But on Wednesday global equities were again deeply in the red, this time on worries that France and its banking system might be the next victim of Europe's debt crisis.
As a scholar of the Great Depression, Bernanke has made it clear he prefers to err on the side of doing too much rather than sit idly as the economy wilts.
Given the weak nature of the recovery despite the Fed's zero interest rate policy and some $2.3 trillion worth of bond buying, many economists question whether monetary policy can be effective in the current environment.
Others, however, say there is plenty more the Fed could do.
Bernanke himself has cited the possibility of aiming for slightly higher inflation, or so-called price-level targeting, for a time as a tool still available to the central bank, although he has dismissed it as too dangerous.
Still, if the economy gets weak enough to rekindle the threat of deflation -- continually falling prices -- it is something Bernanke and his colleagues could consider and analysts suggest should think about.
The Fed cannot be out of ammunition as long as it can buy assets by printing money, said Arnold Kling, scholar with the Mercatus Center at George Mason University. The Fed should be trying to expand the money supply. If anything, a little more inflation would be a blessing.
But pushing for higher prices is a tough sell to the public, so some analysts suggest the Fed would have to frame any such argument in terms of jobs. Creating inflation and increasing the incentive for people to go out and spend could be a stimulant for businesses to invest and hire new workers.
The Fed's unconventional policy steps to date are not without risks, which is why they have elicited both external criticism and internal dissent. Three regional Fed presidents from Dallas, Minneapolis and Philadelphia, already skeptical of QE2, voted against the vow to hold rates near zero until 2013.
Some of the regional Fed presidents who do not have a voting slot on the Fed's policy committee this year probably felt the same way. There could be a better sense of just how divided the committee was when the minutes of the meeting are released in three weeks.
Recent policy pronouncements offer a flavor. Kansas City Fed President Thomas Hoenig is a reliable critic of anything that smacks of inflation risks.
Lately, he has been joined by others.
Given current inflation trends, additional monetary stimulus at this juncture seems likely to raise inflation to undesirably high levels and do little to spur real growth, Richmond Fed President Jeffrey Lacker said two weeks ago.
St. Louis Fed President James Bullard, who recently said he would support further Fed action if the economy weakened, also has some reservations about keeping rates super-low for a lengthy time.
Bullard argued in a paper a year ago that the Fed's use of the phrase extended period to frame the period of low interest rates could dispirit consumers about the future to such an extent that it creates a persistent malaise.
But if Tuesday's vote shows anything, it is that Bernanke is prepared to push for what thinks is right -- opposition or not -- rather than wait for a non-existent consensus that might risk seeing the economy slide back into recession.
(Additional reporting by Ann Saphir)