With little ammunition left in its armory, the Federal Reserve has entered the "jawboning" phase of its campaign to spur stronger economic growth.
Fed Chairman Ben Bernanke and his fellow policymakers emerged from a two-day meeting to declare they planned no major changes in their policy of using low interest rates to get the job and housing markets back on track. In a statement, the Fed pointed to a recent improvement in the outlook but warned that the recovery is still very fragile.
"Economic growth strengthened somewhat in the third quarter," the Fed said in its post-meeting statement. "There are significant downside risks to the economic outlook, including strains in global financial markets."
At least one committee member believes talk alone won’t cure the economy's ills. Charles Evans, president of the Chicago Fed, formally dissented from the decision, saying he thinks his colleagues should be taking further action to revive growth.
So far, the Fed’s strongest artillery has had little apparent impact. Shortly after the Panic of 2008 rocked global financial markets, the central bank flooded the system with cash, slashing to zero the rate banks pay to borrow overnight. That move was followed by a massive program of buying nearly $2 trillion in bonds to force long-term rates sharply lower. But three years after embarking on its easy-money policies, unemployment remains stuck above 9 percent and the housing market is mired in its worst downturn since the 1930s.
"I think they're now in Phase Three which is really jawboning,” said private economist and longtime Fed watcher Gary Shilling. “They want to show they're not hiding in the marble mausoleum in Washington. So (Fed chairman Ben) Bernanke's got all the allies on the board out there on the circuit telling people that they care. They're really trying to demonstrate that they're out of bullets, but they still are concerned.”
The Fed’s “communications” policy has produced some historic changes in the central bank’s typically opaque pronouncements, including an unprecedented promise to keep interest rates low for years, at least mid-2013. The Fed also has launched a PR offensive, making Bernanke available for periodic news conferences, the third of which was planned for Wednesday afternoon.
As part of its new strategy, Fed officials are mulling the idea of setting specific targets for inflation and unemployment, but so far they have not taken explicit action. Instead, Wednesday’s upbeat comments appeared aimed at helping to prop up flagging consumer confidence, spur businesses to hire and get bankers in a lending mood.
Though critics may see the latest talk strategy as inadequate, Fed watchers say the central bankers believe their words still pack an important punch.
“Whether or not we agree it's effective, I don't think they think it's jawboning one bit,” said Diane Swonk, chief economist at Mesirow Financial. “Everyone over there believes it's a reasonable course to take. They believe that talk will make a difference.”
Central bankers may have good reason to take a breather and leave stronger actions on the back burner. Thought the economy remains weak, recent data have shown improvement. Gross domestic product advanced by a 2.5 percent annual rate in the third quarter, according to figures published last week, pushing back fears of a "double-dip" recession. Other recent data point to a job market that is not growing much, but not shrinking either.
“The good news is that employment growth appears stable,” said Paul Ashworth, chief U.S. economist at Capital Economics. “The bad news is that gains of 100,000 or slightly less a month won't be sufficient to reduce the unemployment rate or generate a pickup in income growth.”
The Fed has other reasons to stand pat. The Fed noted Wednesday that inflation is still within the central bank’s comfort zone. Corporate profits are holding up. So is the stock market. With rates at or near record lows, there’s plenty of money in the system.
And, despite a history of independent decision making, the Fed faces an unusually high level of political backlash, including from several Republican presidential candidates, to the idea of pushing more money into the system with another round of bond buying.
“Watching the GOP debates, about the only thing they agree is that they can't stand Bernanke,” said Steve Cortes, founder of Veracruz Research. “I think the bar is incredibly high (for more bond buying.)”
Policymakers and global financial markets also are waiting for clearer signs of what lies ahead -– especially in the ongoing debt crisis in Europe, where leaders of the world's advanced economies are gathering this week for a summit meeting.
Hopes were raised by this week's announcement that European leaders had worked out a deal for a “voluntary” write-down of Greek’s massive debt. But this week’s news that Greek Prime Minister George Papandreou called a surprise referendum on the proposal has thrown that plan, along with the future of the current Greek government, deeply in doubt.
Even if the outlook clears, the Fed has few tools left in its policy toolshed beyond more bond buying. One idea periodically floated involves cutting the interest rate banks get on money they keep stashed in the Fed’s electronic vaults. That might spur them to seek a higher return by writing more loans. But the Fed already is only paying an annual rate of 0.25 percent. And the amount of reserves the Fed holds is relatively small, according to former Fed Gov. Mark Olson.
And with so much uncertainty facing policymakers, divisions on the board have made it difficult to agree on even the wording of the Fed’s regular pronouncements. Until the economy shows clear signs of improvement, that’s unlikely to change.
“They will disagree very amicably,” said Olson. “But they will continue to disagree.”
CNBC's Steve Liesman shares key takeaways from the 12:30pm ET Fed decision.