The Fed Chairman said today that he "expects economic growth to improve slowly and inflation to ease": Markets fell in the wake of his speech in the Twin Cities, in which he said monetary policy measures already in place will be all we'll see from the Fed for now.

The Federal Open Market Committee meets again in September, and they'll debate using any more monetary policy measures to stimulate the economy. Until then, it's business as usual.

Except that business at the Fed these days in anything but usual. Bernanke is all but tapped out. All of the ordinary measures that the Fed usually deploys to influence the economy were used up months even years ago. Those ordinary measures are open market operations (the buying of bonds from the banks to pump more liquidity into the system); demanding banks hold reserves at the Fed (the banks are actually holding more than they're required to right now); adjusting interest rates (already at zero); and lending at the discount window; (reduced to 0.75%).

Now the Fed is deep into the use of "extraordinary measures." These include quantitative easing, of which we've had two rounds, and signaling, whereby the Fed told us we can expect two more years of zero rates. There was talk that the Fed might do a merry little dance with interest rates called Operation Twist, in which long-term rates would be flattened even more than they are now. Or it could drop the rate that it pays banks to hold assets at the Fed, from 0.25% to zero.

But Bernanke won't do either of these things, it seems. Or not yet, at least.

bq. ...the Committee decided at its August meeting to provide more specific forward guidance about its expectations for the future path of the federal funds rate. In particular, the statement following the meeting indicated that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. That is, in what the Committee judges to be the most likely scenarios for resource utilization and inflation in the medium term, the target for the federal funds rate would be held at its current low level for at least two more years.

bq. In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. My FOMC colleagues and I will continue to consider those and other pertinent issues, including, of course, economic and financial developments, at our meeting in September and are prepared to employ these tools as appropriate to promote a stronger economic recovery in a context of price stability.

In other words, wait.

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