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 on 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.
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