As the Federal Reserve weighs more monetary easing, fears about future risks may compel policymakers to act more aggressively Wednesday than what current weak data might suggest.
The central bank could do nothing. Or it could extend the period in which benchmark interest rates will stay near zero. The current outlook is until late 2014.
But with the economy slowing, predictions lean toward a continuation of Operation Twist, a program to sell short-term securities and buy longer-dated ones to further lower long-term rates.
This route is considered safer than some alternatives because it doesn't create a net increase in money supply and add to inflationary pressures.
But a new round of asset purchases, or quantitative easing (QE), is also possible as the Federal Open Market Committee wraps up its June meeting Wednesday.
$2 Trillion In Two Rounds That would revive a more aggressive and controversial monetary stimulus tool by creating new money to inject into the economy. Since the recession, the Fed has pumped in $2 trillion via two rounds of QE.
Recent comments from Fed Vice Chair Janet Yellen indicate dovish policymakers like her want to be proactive and neutralize threats before they hit the economy.
"There are a number of significant downside risks to the economic outlook, and hence it may well be appropriate to insure against adverse shocks that could push the economy into territory where a self-reinforcing downward spiral of economic weakness would be difficult to arrest," she said this month.
Yellen downplayed the risk of more asset purchases by saying the Fed can effectively raise rates and return its balance sheet to a normal size.
But Fed Chairman Ben Bernanke told Congress this month that more QE, while an option, could yield "diminishing returns.
Rates are already near record lows. Trimming them further may not encourage more business borrowing or homebuying.
"This is a particularly difficult meeting," said Tim Duy, a University of Oregon economics professor who predicts the Fed will continue Twist. "You could make a case to do more.
Policy Effects Dwindle That could be justified by signs of a sagging economy, risks from Europe's debt crisis and relatively tame inflation, he said. But the Fed's latest "beige book," which surveys business contacts and is used by policymakers at their meetings, didn't point to a collapse in activity, he added.
Whatever the Fed decides to do, any easing is unlikely to have much effect, said Dan North, Euler Hermes' North America chief economist, who also sees the Fed extending Twist.
"Monetary policy is getting increasingly impotent," he said.
Despite the trillions of additional dollars in the economy, banks are not lending much more, he noted. Loan demand is weak, businesses still are holding onto cash and banks are risk averse.
Yet North says another future risk could push the Fed toward more QE, if not Wednesday, then perhaps later in the year.
The "fiscal cliff" of steep tax hikes and spending cuts will hit early in 2013 if Congress doesn't act to avoid it. Uncertainty over how the issue will be sorted out is already hurting the economy.