In a remarkable parallel to last year, Fed
officials head into their August meeting amidst
weak growth and questions about the
possibility of further monetary easing. There
are of course major differences between then
and now, but if downside risks materialize,
further easing might well become appropriate.
The Fed’s easing options fall into three main
groups: 1) communication, 2) asset purchases,
and 3) interest rate policy.
Changes in official communication would
likely be the first step in any renewed easing.
In particular, we believe an attractive option
would be the use of some kind of forward
guidance for the size of the Fed’s balance
sheet (“extended period” currently only refers
to the level of the funds rate).  
Asset purchases have played a major role in
the Fed’s response to the recession and
financial crisis and would likely be a
component of any future easing.  However, one
potential drawback of additional QE is that the
Fed’s balance sheet is already quite large.  We
therefore think the Fed could consider
changing the composition of its portfolio by
buying longer-duration securities.
  A final easing option often listed by Fed
officials is a cut in the interest on excess
reserves (IOER) rate. We see little merit in this
option, and continue to believe that the Fed is
unlikely to use it.
  The US economy barely grew in the first half
of 2011, with Q1 growth revised down to a
meager 0.4% pace and Q2 at only 1.3%.  With
revisions now showing a deeper slide in 2008-
2009, the economy has yet to retain its
prerecession peak.  Policymakers did not help
the mood, as the impasse over the federal debt
ceiling continued.