As bankers and investors anxiously wonder what the Federal Reserve's decision on interest rates might be Tuesday, some might be hunting for clues in recent statements by Fed officials themselves.
The Fed watchers won't find much to hang onto.
The nation's monetary policymakers leave no doubt they are inflation fighters, but otherwise they can be hard to read. And they appear to be struggling to come to grips with some recent changes in the economy.
Official data now show both unemployment and inflation at their lowest levels in a generation. In August, the unemployment rate fell to 5.1% and core consumer price inflation was under 3% on a year-over-year basis.
"The best numbers we've seen in many, many years," Fed Vice Chair Alice M. Rivlin said in a recent speech. The economy is doing "unbelievably well," she said.
But the economic paradox these numbers represent has caused acute anxiety on Wall Street. Financial market sentiment about what may happen next with inflation, rates, and business in general has flip-flopped wildly in the past month.
Some of the nervousness seems to have found its way into the Fed's own sanctum.
In an extraordinary breach of the rectitude surrounding central bank policymaking, Reuter news service last week cited a senior Fed source in reporting that a majority of the system's 12 regional banks favored a discount rate hike.
A serious debate may be in store Tuesday within the collegial ranks of the Federal Open Market Committee, which sets monetary policy.
"It's a very, very close decision. More so than any others that I can recall," said Wayne M. Ayers, chief economist at First National Bank of Boston and a former Fed economist.
Ms. Rivlin summed up the current puzzle: "We used to think that if you got the unemployment rate down to 5.1% that inflation would accelerate, but it hasn't happened," she said, quickly adding the Fed has been on guard for any signs of inflation attributable to tighter labor markets.
She was referring to the "natural rate" of unemployment, below which inflationary pressures are thought to accelerate. Many economists felt this rate was 6%, but unemployment has been under that level for more than a year with little effect on inflation.
As a result, no one knows just where the inflationary trigger point is. As Donald H. Straszheim, chief economist at Merrill Lynch & Co. puts it, a "full employment experiment," is now under way.
The experiment is causing jitters, with officials at regional Fed banks among those who are anxious. Gary H. Stern, the president of the Federal Reserve Bank of Minneapolis, was a surprising dissenter in July when rates were left unchanged by the open market committee.
Later in July, he termed current inflation as "modest" but "perhaps not as low as we could get it." Some economists said Mr. Stern's vote probably represented the views of all the regional banks.
Five of the 12 regional Fed presidents cast votes on the Federal Open Market Committee. Four vote on a rotating basis while the president of the Federal Reserve Bank of New York has a permanent vote. They join the seven members of the Fed's board of governors to comprise the committee.
Another regional voter, New York Fed president William J. McDonough, has offered careful and balanced remarks about the need for price stability, saying this requires an inflation rate under 3%.
But in a speech last March to the New York State Bankers Association he cited economic data problems that overstate inflation and cautioned that "a zero inflation rate is not the same thing as price stability."
He warned that setting the Fed's inflation goal too low might risk "tipping the economy into a deflation" - falling prices. "History has shown that deflation can be extremely harmful to the economy in general, and to financial markets in particular," he said.
Ms. Rivlin, speaking last week in New York to international bankers, said the nation's inflation rate may well be running close to zero right now, "if we knew how to measure it."
On the other hand, Janet L. Yellen, a Fed governor, recently told the Washington Post she was concerned that the economy had entered an "inflation danger zone" because of tightened job markets.
She cautioned that "history teaches some lessons, and you have to be foolish to ignore them." She mentioned an uptick in inflation in the late 1980s. Ms. Yellen said inflation remains low, with few signs of higher labor costs, but said current conditions still "make me nervous."
