The ink is barely dry on the Fed’s policy shift this week, but the debate is already shifting to the next move.  Jon Hilsenrath at the Wall Street Journal offers this assessment:

Since lecturing Japanese officials in the late 1990s and early 2000s about how they should deal with their nation’s economic malaise, Mr. Bernanke has made clear his mindset about post-bubble economics: Keep experimenting as long as the economy is stumbling and inflation is muted.

I think Hilsenrath is correct – as long as the economy continues to stumble along, the Fed will continue to tinker with policy.  The likely policy paths:

Other options have been discussed. Among them, officials are deep in talks about whether the Fed should shift communications strategy to be clearer about what it would take to get them to raise rates. More clarity might quell any lingering fears in financial markets that the bank might prematurely tighten monetary policy. The Fed also could buy more securities, lower a 0.25% rate it pays banks on their cash deposits at the central bank or consider other unconventional measures.

I would like some more clarity on the “other” measures, but that aside, the usual suspects.  I tend to think it will be a challenge to shift the communications strategy given the willingness of Fed policymakers to publicly challenge the stance of monetary policy.  Moreover, the stated preferences of policymakers to keep their options open seems incompatible with a firm policy commitment.   In any event, should we be looking for more at the November meeting?  One former Fed staffer says no:

Nathan Sheets, who retired as director of the Federal Reserve‘s international affairs group this summer, said he believes the central bank will pause for a while after taking unconventional steps in August and September to bring down long-term interest rates as it assesses the impact of its actions.

“I wouldn’t expect at its November meeting the Fed is going to roll out some additional package,” he said in an interview.

Sheets sees the Federal Reserve’s past two policy moves as aggressive:

Mr. Sheets, who is now the top international economist at Citigroup Inc., said he believed the combination of the actions the Fed took in August and this week were substantial. Both moves provide substantial stimulus to the economy by pushing long-term interest rates down sharply and there is good reason to see how those impacts play out, he said.

He said he was puzzled by the stock market’s sell-off in response to the latest move, which he saw as more aggressive than he expected.

As I noted earlier today, the plunging ten-year TIPS breakevens are a clear no confidence vote for monetary policy.  And quite frankly, not surprising.  The Fed downgraded their assessment, highlighting the substantial risks to an already subpar outcome, and produced what was generally expected – mostly a shift in asset mix that no one believes is anywhere near enough to serve as a counterweight to the severe strains bearing down on the economy.  Moreover, the ongoing dissentions and half-measures only further reinforce the notion that the Fed may not be done, but they are not going to pull out all the stops.  At least not until it is too late.

As for November, nothing can be ruled out.  If you believe there is a high probability Europe implodes between now and then, then you should also believe the odds are high the Fed will act.  Aside from financial crisis, all will depend on the flow of data.  If the data falls broadly in-line with the Fed’s expectation of firming activity in the second half, then they could try to take a pass at the next meeting.  But if the forward looking indicators deteriorate, and bring down inflation expectations as well, the Fed will be pressed into service.

Regarding the flow of data/news, note that FedEx has downgraded its outlook:

Providing fresh evidence of weakening global trade, FedEx Corp. said Thursday it is cutting capacity and trimmed its full-year earnings forecast amid weaker demand, mainly due to slowing sales of consumer electronics made in Asia.

The news comes as a slide in Asian air cargo traffic that started in July has shown no immediate signs of abating. The slowdown extends to the makers of perishable foods, high-end apparel and automotive and industrial parts that fill the holds of planes flown by FedEx and rivals such as United Parcel Service Inc. and Cathay Pacific Airways Ltd.

“The consumer just doesn’t have an appetite” for spending more, Chief Executive Fred Smith said during a post-earnings conference call. As a result, he added, “we don’t anticipate a significant peak [shipping season] this year.”

The half-empty cargo holds of the planes that connect manufacturing centers to their end customers provide a stark example of the weak demand outlook facing the global economy, led by a sharp about-face in Asia’s once-humming workshops.

This follows along with expectations of a weak holiday shopping season:

Christmas is already shaping up to be a struggle for the nation’s retailers.

It isn’t even fall yet, but the first forecasts of the all-important year-end period are out, and they’re pointing to more muted gains than last year. Shoppers are expected to make fewer trips to stores and, when they do show up, to head straight for bargains they’ve researched in advance.

Meanwhile, initial unemployment claims show no indication the pain in the labor market will soon ease. Overall, the incoming news might not point to recession, but it sure feels a lot like the post-2001 recession slowdown that send payroll growth into negative territory.  Of course, the answer to that turned out to be the housing bubble, and we sure aren’t doing that again anytime soon.

Bottom Line:  The Fed likely wants to take a break.  The US economic data and the fast moving situation in Europe, however, are likely to put the Fed back into play sooner than later.

This post originally appeared at Tim Duy’s Fed Watch and is reproduced here with permission.