by Calculated Risk on 8/08/2011 02:01:00 PM

There is a one day meeting of the FOMC tomorrow and no press briefing. In light of recent developments, the FOMC statement to be released around 2:15 PM ET Tuesday might be interesting.

In July, during his Congressional testimony, Fed Chairman Ben Bernanke made it clear that another round of monetary accommodation (aka QE3) would depend on both a further deteriorating in the economic outlook and the renewed threat of deflation.

Clearly the economy is weaker than the Fed's forecast in June, and there have been some initial signs of disinflation (Core PCE increased 0.1% in June or 1.3% annualized). However, based on Bernanke's comments, I think the Fed will wait for further evidence on inflation, and I think a major announcement at the meeting tomorrow is unlikely.

However the FOMC statement will change. Here are a few key sentences from the June statement:

... the economic recovery is continuing at a moderate pace ... The slower pace of the recovery reflects in part factors that are likely to be temporary ... Inflation has picked up in recent months ...

The unemployment rate remains elevated; however, the Committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline ... Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate. ...

... The Committee continues to anticipate that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

"Moderate", "temporary", and "picked up" will all probably change. Growth has been worse than "moderate", and inflation has subsided - but probably not enough for QE3. Still the Fed might make some changes as suggested by Jon Hilsenrath at the WSJ: Fed Has Some Tricks Left, but None Are Magic

Since 2008, the Fed has assured the public that it wouldn't raise short-term interest rates for an "extended period," that is, at least several more months. It has been vague about plans for its vast portfolio of securities. The Fed now has a strategy—which it has disclosed—for gradually dumping the securities someday. The Fed can use its end-of-meeting statement to define "someday," perhaps saying it will hold on to those securities for an extended period, too.

So the Fed might change the "extended period" language to include maintaining the current level of security holdings for an extended period. Not a huge change. QE3 is unlikely, but not impossible - although I think the Fed will wait for further evidence of renewed deflation fears, and also try to communicate any plans in advance.