The Federal Reserve building in Washington.
This will drive the Fed watchers crazy.
"Further easing actions could be warranted if the recovery proceeds at a slower-than-expected pace, while a significant acceleration in the pace of recovery could call for an earlier beginning to the process of policy firming than the (Federal Open Market Committee) currently anticipates," Janet Yellen, No. 2 to Ben Bernanke at the Federal Reserve Board in Washington, said in speech Wednesday night in New York.
A classic on-the-one-hand-and-on-the-other-hand statement for which economists are famous. It will do little, if anything, to settle the debate about whether the Fed will deploy a third asset-purchase program to jolt the economy.
Still, there is something to be learned from Ms. Yellen's stance. One, it shows she is comfortable with the Fed's current policy of leaving rates extremely low until at least the end of 2014. That's significant, as Ms. Yellen is considered to be among the central bankers closest to Mr. Bernanke. It suggests the core of the Fed's policy committee has absorbed the arguments of those who would do more and those who would tighten, and has decided to stay the course.
Two, Ms. Yellen's remarks show the Fed will be watching economic data especially closely over the next few months. Like Mr. Bernanke, Ms. Yellen thinks the rapid decline in the unemployment rate is about to level off -- with five million fewer people employed than the pre-recession peak. This weighs heavy on the Fed's leaders. William Dudley, the head of the New York Fed and the vice-chairman of the policy committee, reiterated Thursday morning that the U.S. labour market is far from normal. But both Ms. Yellen and Mr. Dudley acknowledged that the economic recovery is firmer. As long as that continues, both appear willing to ignore any impulse they might have to lower borrowing costs further.
"The incoming data on the U.S. economy has been a bit more upbeat of late, suggesting that the recovery may be getting better established," Mr. Dudley said in Syracuse. "But, while these developments are certainly encouraging, it is far too soon to conclude that we are out of the woods in terms of generating a strong, sustainable recovery."
The bottom line: QE3 is on the table, but has been pushed off to the side. The compromise at the Fed, for now, is low rates for a long time, but no additional measures. If data broadly signal continued expansion, even a muted one, that compromise should hold. If the economy stumbles, QE3 will be back in the centre of the table.