A key element to the two-day meeting of the Federal Reserve ending today will be whether or not the key players are on the same page with regard to future actions to help stimulate the dormant U.S. economy.
At their August meeting it was remarkably clear that the only thing all 10-members of the powerful Federal Open Markets Committee agreed on was that the economy is weakening.
Beyond that there appeared to be little common ground as to either specific actions or whether the Fed should take a strong proactive approach or back off from further intervention.
Current conventional wisdom holds that today the Fed will announce some new incremental initiatives, beginning most likely with an effort to lower long-term borrowing costs by shifting its $2.8 trillion bond portfolio toward more long-term securities.
Financial markets widely expect the move in a program sometimes referred to as "Operation Twist" after a like-named Cold War era monetary maneuver.
Although not a done deal, we see a high probability that the FOMC will announce further easing steps at the conclusion of this weeks meeting, Goldman Sachs analysts wrote in a note to clients. A change in the composition of the Feds balance sheet -- Operation Twist -- looks very likely.
The Goldman analysts believe the asset shift will occur despite concerns for rising inflation, the loudest argument made against further Fed intervention.
Measures of core inflation have recently acceleratedthe core CPI reached 2.0% year-over-year in Augustbut we do not believe this will stand in the way of easing at the meeting. Fed officials have made clear that they expect inflation to cool as the effects of a rise in commodity prices and supply-chain disruptions in the auto sector wane, the analysts wrote.
The action isnt likely to happen without significant discord both within the ranks of the Fed and among Congressional Republicans who oppose additional measures that ease fiscal policy, that is artificially pumping cash into the economy.
Within the Fed the existence of a rift between Fed Chairman Ben Bernanke, who has supported an interventionist strategy, and a handful of regional Fed presidents, who dont, has been well documented.
That rift appears to have grown much wider as the economic recovery has all but stalled over the summer.
At the Aug. 9 meeting the FOMC agreed to maintain interest rates at exceptionally low levels through mid-2013.
It was an extraordinary announcement for two reasons. First because the Fed so clearly articulated a monetary policy moving forward. (The Fed has historically operated with almost mythical secrecy). Second because three members of the committee -- identified as Richard Fisher, president of the Dallas Fed, Charles Plosser of Philadelphia and Narayana Kocherlakota of the Minneapolis Fed -- dissented from that policy.
Its no secret that a handful of FOMC members have grown skeptical of the easy money policies advocated by Bernanke and the rest of the majority. Those policies have included two-and-a-half years of interest rates at a record-low range of 0% to 0.25%, and artificially pumping cash into financial markets through the purchase of U.S. Treasuries, a strategy known as quantitative easing.
The skeptics, inside and outside the Fed, say these programs havent worked and are in fact harmful because they raise the risk of inflation.
That skepticism is shared by many members of Congress, particularly Republicans and those who identify with the fiscally conservative tea party movement.
Indeed, the widening rift among FOMC members is reminiscent of the deep divide in Congress over U.S. fiscal policy moving forward.
With that in mind, top GOP congressional leaders wrote to Bernanke this week urging the central bank to desist from further economic interventions, echoing criticism voiced by Republican presidential candidates in recent weeks.
"We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy," Republican congressional leaders wrote in the letter to Bernanke, which they released on Tuesday.
Fed officials, however, believe that by shifting their bond holdings they could encourage mortgage refinancing and push investors into riskier assets, such as corporate bonds and stocks, without stoking a run-up in consumer prices.
Members of the Fed's policy-setting committee are expected to announce their decision at about 2:15 p.m. at the conclusion of a two-day meeting.
Faced with a stubbornly high unemployment rate, consumer and business confidence sapped by a troubling U.S. credit downgrade, and an escalating sovereign debt crisis in Europe, Fed officials have signaled they would seek to prevent already sluggish U.S. growth from weakening further.
There is considerable fear that the U.S. is slipping back into recession.