The Federal Reserve is thinking about additional monetary easing aimed at boosting the economy, but the governing board is divided, according to Neil Irwin.

Federal Reserve officials lack a strong consensus over what they should do next in setting the nation’s monetary policy, according to minutes of their last policy meeting, showing a mix of views as to why the U.S. economy remains weak and what, if anything, they should do about it.

At a June 21-22 meeting, some leaders of the central bank argued that if there were no progress reducing unemployment, the Fed should consider further expanding the money supply — which in practice would mean a third round of “quantitative easing,” or buying hundreds of billions of dollars in Treasury bonds.

“Some participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate,” and if inflation pressures dissipated, “it would be appropriate to provide additional monetary policy accommodation,” said minutes from the Federal Open Market Committee meeting released Tuesday afternoon.

I think we can put to rest the idea that the Fed is “out of bullets.” They actually have a number of possibilities at their disposal. One simple approach is that they could stop paying banks to park reserves, and either reduce those payments to zero or charge the banks for the privilege. That could increase lending. They could set a higher inflation target and hope that inflation starts to accelerate, which would increase exports as the dollar weakens. And there could be a better-designed QEIII to increase economic activity.

The markets shot up on Fed Chair Ben Bernanke’s comments before Congress today that some stimulative measures could be taken.

Bernanke told the House Financial Services Committee:

“The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support.”

His comments, made on the first day of his semiannual testimony to members of Congress about the U.S. economy and monetary policy, came as investors were divided over whether the Fed would introduce another round of stimulus to boost the economy, especially after June’s dismal jobs report. The Fed’s “easy money” policies since 2008 have been fueling the stock market’s rally.

So Helicopter Ben may swoop in again. With fiscal policy going nowhere – we’ll be lucky to get out of all this without massive contraction – it may be the only chance for improvement over the next year or so.

David Dayen

David Dayen