Helicopter Bernanke Grounded For Now

The Federal Reserve has slashed interest rates to near zero and spent more than $2 trillion on mortgage securities and other debt in a herculean effort to boost economic growth.

But with the expansion flagging and inflation edging up, analysts say the Fed can do little now except wait and see whether the soft patch proves to be more than a blip caused by spiking oil prices and Japan's earthquake.

Policymakers wrapping a two-day meeting on Wednesday will likely reiterate their intention to keep rates at 0%-0.25% for an "extended period" and let their $600 billion Treasury buying pro gram expire June 30. The Fed is expected to keep reinvesting maturing securities, maintaining its $2.6 trillion balance sheet.

"They could do another round of asset purchases but they're a bit handcuffed here because the inflation story is a bit more difficult than it was a year ago," said Scott Brown, chief economist at Raymond James.

May's consumer price index rose 3.6% vs. a year earlier, the most since October 2008. Core CPI, which excludes food and energy, rose 1.5%. That's below the Fed's unofficial 2% target but the seventh straight gain from October's multidecade low of 0.6%.

Fed chief Ben Bernanke has blamed the inflation uptrend on transitory gains in the price of commodities such as oil, though even he admits price pressures are a greater concern than when he launched his second round of quantitative easing last fall.

Some policymakers are more worried, arguing that massive monetary stimulus will cause prices to soar as growth recovers.

More aggressive Fed action would raise a firestorm among Republicans on Capitol Hill.

In short, "I don't think we're going to see another round of asset purchases unless we see dire economic numbers and a renewed threat of deflation," Brown said.

For weeks economic data have weakened, from jobs to factories to consumer spending. Existing-home sales fell 3.8% in May to an annualized 4.81 million units, the National Association of Realtors said Tuesday. That's a six-month low, but in line with views.

Such reports have raised speculation that the Fed might embrace QE3, but Bernanke and other officials have given no hint of that. Even as analysts cut Q2 growth forecasts, most expect a solid rebound ahead.

"We think the economy is actually going to surprise folks in the second half of the year," said Mark Vitner, a senior economist at Wells Fargo.

The Fed currently expects the world's No. 1 economy to grow 3.1%-3.3% this year despite a disappointing 1.8% growth rate in Q1 and a Q2 that isn't looking much better.

Yet others aren't so sure.

The Economic Cycle Research Institute predicts a slowdown in global industrial production starting this summer, downshifting the U.S. economy into first gear.

The Fed's task is complicated by debt concerns in Washington, which will almost certainly refuse further spending increases to try to boost the economy.

"If we need fiscal stimulus, we ain't getting it," said Joel Naroff, president of Naroff Economic Advisors. "The Fed's got to hope that everything plays out as well as possible."