Indecisive Fed expected to again hold rates steady

In 1890, the psychologist William James wrote that there was "no more miserable human being than one in whom nothing is habitual but indecision."

Indecision is certainly not the habit of Federal Reserve policy makers. But as a divided Fed gathers next week to consider interest rates, they may yet again revise positions that have repeatedly shifted since December.

Most observers do not expect the Federal Open Markets Committee, which sets monetary policy, to raise the crucial federal funds rate when they meet on Tuesday and Wednesday in Washington.

"I think it's very plausible you'll see zero" change, said Dean Baker, co-founder of the Center for Economic and Policy Research. Policy makers do not want to surprise markets, he added.

"The last thing on earth that they want to do is a rate hike that isn't anticipated."

For markets, the last eight months have still been an emotional roller coaster.

In December, the Fed increased rates for the first time in nearly a decade.

The decision drew a line under post-financial crisis rate policies, a time of easy money when the Fed also expanded its balance sheet by trillions in order to nurse the economy back to health.

It was also a show of confidence in the US recovery -- confidence that would soon coincide with nagging doubt.

- Repeated reverses -

In the short time since the start of "policy normalization," the Fed's data-driven approach to monetary policy has been buffeted by the changing winds of political developments and wavering economic indices.

In January, Fed Vice Chair Stanley Fischer said 2016 could see three to four rate increases.

But the following month, Chair Janet Yellen said conditions were worsening and even raised the unlikely possibility of reversing course and cutting rates.

The end of May found her saying that a rate hike would "probably" be appropriate in the "coming months."

Yet three weeks later, the FOMC split, with some members calling for a rate hike even though the committee ultimately decided to maintain the federal funds rate unchanged at 0.25-0.50 percent.

Britain's looming June 23 referendum on whether to leave the European Union was an important factor in keeping rates as they were, Yellen said.

Since then, Britain shocked the world by voting to exit the EU, sparking fresh turbulence in markets and causing the International Monetary Fund to downgrade global growth forecasts by a tenth of a percentage point through next year.

The disagreements in June could reflect the FOMC's fraught attempts to read economic data, like job creation numbers that have swung sharply the past two months.

Some FOMC members believe continued low rates may foster price bubbles and over-leveraged investments, or that delaying a rate hike now may force the Fed to bump rates up abruptly down the line, delivering a shock to the system.

Fed governor Daniel Tarullo told The Wall Street Journal this month that he does not see either scenario as a pressing threat.

According to Tim Duy, senior director of the Oregon Economic Forum, the Fed has focused on rate policy to the exclusion of another tool -- balance sheet policy -- which could help it provide financial stability in a period of persistently low interest rates and low inflation.

By selling some of its longer-term securities, the Fed could drive up rates and broaden the yield curve -- the spread between the rates on short- and longer-term securities.

Doing so would effectively be the reverse of the policy of the past seven years which aimed at recovering from the Great Recession.

"This whole discussion assumes the Fed will find it necessary to tighten policy," Duy wrote in an email. "When or whether that is really true is another issue."