Uncertainty about tax rates because of record budget deficits and Washington squabbles over how to curb them further discourage hiring and investment.
It all makes for a difficult policymaking climate. Seldom has there been such division in the FOMC ranks. While there are those, such as Chicago Fed President Charles Evans, who are outspokenly for "more accommodation," there are others who adamantly oppose more easing unless the economy deteriorates even further. Then there are the fence-sitters.
In late August, the mainstream Lockhart said that no policy option could be ruled out given economic weakness, but said, "it is important that monetary policy not be seen as a panacea" and warned "pushing beyond what monetary policy plausibly can deliver runs the risk of creating new distortions and imbalances."
Lockhart added that "in more adverse scenarios, further policy accommodation might be called for. But as of today, I am comfortable with the current stance of policy...." He was speaking before a dismal employment report showed no jobs growth in August.
Notwithstanding the uncertainty and dissension, it must be remembered that the Fed has a statutory "dual mandate" to pursue price stability AND maximum employment. That is something Bernanke and his colleagues take very seriously. It was with reference to that dual mandate that the FOMC launched a second round of "quantitative easing" last November, citing rising unemployment and falling inflation.
Unemployment was higher and inflation lower then, which is why Minneapolis Fed President Narayana Kocherlakota said he dissented against the extension of zero rates in August.
But the labor market situation remains intractably deplorable, and that is the side of the dual mandate that matters most to Bernanke and most FOMC members these days — not just the high rate but also the duration of unemployment.
Whatever the reasons for this slough — be they fiscal, regulatory or external — one thing is for sure: Continued evidence that the economy is growing too slowly to reduce joblessness will, in the minds of most Fed officials, virtually force the central bank to keep trying to make things better. "QE3" is a definite possibility.
So far, inflation and inflation expectations are seen as giving the FOMC a permit to keep depressing rates and injecting money. We only can wonder with trepidation about the long-term consequences.
Steve Beckner is senior correspondent for Market News International. He is heard regularly on National Public Radio and is the author of "Back From the Brink: The Greenspan Years" (Wiley).