Federal Reserve
Susan Walsh/APFederal Reserve Chair Janet Yellen
By Ann Saphir
and Jonathan Spicer

Federal Reserve policymakers this week are set to continue paring their massive bond-buying stimulus, but below the smooth surface of a likely unanimous vote lies a deeply divided Fed struggling to lay the groundwork for more difficult decisions ahead.

Fed Chair Janet Yellen hinted at the U.S. central bank's broad agenda a couple weeks ago when she laid out three "big" issues officials need to track: the level of slack in the labor market, whether inflation is rising back toward the Fed's 2 percent goal, and the factors that could derail the economic recovery.

Unexpected "twists and turns," she said, could force the Fed to diverge from its highly telegraphed plan to end asset purchases later this year and raise interest rates in 2015.

Yellen and her colleagues are debating what economic conditions would set the stage for a rate hike, whether the Fed should start letting its balance sheet shrink before or after it acts to push up borrowing costs, and whether it should respond to the possibility of asset bubbles in some markets.

Fed officials, who will meet Tuesday and Wednesday, disagree sharply on the answers to these questions, and consequently on the best longer-term plan for rate rises. But unlike their counterparts at the European Central Bank, who face a threat of deflation, U.S. central bankers are under little pressure to pivot quickly on policy.

"We doubt any major change will emerge" in the Fed's policy statement, said Annalisa Piazza, fixed income strategist at Newedge. The statement, to be released Wednesday at 2 p.m. Eastern time, at the close of the meeting, won't be accompanied by new economic forecasts or a news conference, events that are only scheduled quarterly.

Recent data has largely borne out the Fed's presumption that a mid-winter slowdown in the economy was due to unusually severe weather. In addition, with bond yields down and stock prices up since the Fed began tapering its asset purchases in January, market conditions aren't threatening to undercut the economy's momentum.

The relative stability makes it an easy call for the Fed to trim its monthly bond buying by $10 billion for a fourth consecutive meeting. This would take the purchases down to $45 billion and put the Fed about halfway along its plan to end the quantitative easing program by late this year.

And because officials completed a much-needed revamp of a low-rate promise last month, they can now take the time to dig into the longer-term strategy that will guide them when they finally begin raising rates.

Raising Rates: 'A Matter of Feel'

At the last policy meeting in March, all but one official backed a new pledge to keep rates near zero for a "considerable time" after the bond-buying ends. The lone dissenter, Minneapolis Fed President Narayana Kocherlakota, has already signaled he won't continue to dissent.

Since then, a handful of officials have suggested the Fed should be more specific about when rates will rise. Boston Fed President Eric Rosengren has floated the idea of keeping rates near zero until the economy is within one year of reaching full employment and 2 percent inflation.

Richard Fisher, who heads the Dallas Fed, panned the idea. "It is a matter of feel," he told reporters in Austin earlier this month. "I don't think you can put a specific time frame on it. And I wish we could, but I don't think that would be responsible monetary policy."

Another question policymakers need to answer in coming months is whether a test facility for conducting reverse repurchase agreements, which temporarily drain cash from the financial system and could help control market rates when the Fed tightens monetary policy, will be adopted as a key tool.

The relatively quiet bond market "allows the Fed to reflect on big-picture themes," said Thomas Costerg, economist at Standard Chartered Bank. "There is mounting pressure to clarify the exit strategy and the role of some liquidity facilities, although it is unlikely that the Fed will decide this now."

-Additional reporting by Richard Leong in New York.

Increase your money and finance knowledge from home

Basics Of The Stock Market

Stock Market 101 - everything you need to know but were afraid to ask!

View Course »

Investing in Real Estate

Learn the basics of investing in real estate.

View Course »

Add a Comment

*0 / 3000 Character Maximum


Filter by:

Thank you President Obama. I did not vote for you in 08 or 12, but thankfully as I near retirement all of my stocks have recovered and gained from the Bush collapse of 2008. The prospects of Clinton or Biden don't move me for 2016, but neither do Paul, Cruz or Bush, and Christie is involved in one probe after another.

April 28 2014 at 6:36 PM Report abuse +1 rate up rate down Reply

What applies to government action in general also applies to the Fed. The Fed's actions are actions of force, not market actions.

In any action involving force there are two groups of effects, the intended effects and the unintended effects. The Fed studies long and hard but, in the final analysis, unintended effects are not predictable or controllable. And rarely are they beneficial.

So the Fed pretends that it is pulling levers in an atomic power plant and those levers will reliably cause certain things to happen.

But I remember when Hank Paulson and Ben Bernanke were telling us that the real estate problem was confined to the sub-prime markets. As it turned out, Paulson was lying to Congress but Bernanke actually believed what he was saying. Either way, the levers didn't work.

For myself, I'm raising cash, picking up physical gold on the dips, and dreading the day when again, everyone will know that the problems cannot be controlled or even understood by the Fed or the Treasury. They are burning the furniture to heat the house. It's not sustainable.

April 28 2014 at 2:27 AM Report abuse rate up rate down Reply

Employment does not pivot or balance on interest rates, QE, money supply, nor anything other than demand for goods and services. The economy is in bad shape, and getting worse by the day. Consumer spending hasn't reach a level to encourage hiring. We still have way too many living off of government assistance programs and unemployment checks. Basically, we have minimal cash flowing through the retail sector. During the past six years or so, government debt has been the only catalyst keeping the government and the economy afloat. The Federal Reserve can not create jobs, nor can it create demand for goods and services. "The Washington Brotherhood" is the only entity that can restore economic health and stability. And, going by their past record, they have absolutely no intent or desire to do what's needed to restore the economy.

April 27 2014 at 9:19 PM Report abuse rate up rate down Reply
Robert & Lisa

Your boss is the problem Ms Yellen. I will be completely amazed if we don't have a financial collapse before we get him out of office.

April 27 2014 at 7:48 PM Report abuse -1 rate up rate down Reply

Good luck Yellen. The truth is the economy is NOT recovering on its own, she pulls the training wheels off the house of cards falls. They have painted themselves (all of us) into a corner. Can you say hello inflation? Blaming this s h i t economy on THE WEATHER is such a joke. The truth is the economy is in a bad way due to BAD policy all around. We are in a black hole now. There will not be ANY way they can get out of this one and THEY KNOW IT. Wake up people.

April 27 2014 at 11:42 AM Report abuse rate up rate down Reply
1 reply to apparelp's comment

Sounds like you're another short who missed the boat. Sorry about that.

April 28 2014 at 3:55 PM Report abuse +1 rate up rate down Reply