WASHINGTON It has become a familiar choreography for the Federal Reserve: Officials ease monetary policy, and the economy improves. Then conditions weaken, reviving debate about the need for further stimulus.
The central bank again finds itself at that difficult juncture heading into a meeting next week. As Europe's banking crisis intensifies and the labor market sputters, the Fed appears increasingly likely to offer more monetary stimulus - despite political opposition, internal reticence and concerns about whether it will be effective.
Given an outlook that is weak but not recessionary, the Fed could opt for the relatively low-hanging fruit of extending "Operation Twist," its effort to drive down long-term borrowing costs by selling short-term securities to buy longer-term ones.
Another relatively costless tool it could employ would be to push official guidance for when overnight interest rates are likely to rise, now set at late 2014, even further into the future.
Many believe that with government bond yields already near record lows as investors flock to safety, an extension of Twist, which is due to expire at the end of the month, or even outright bond purchases, might not do much good.
Atlanta Federal Reserve Bank President Dennis Lockhart, who has argued that the bar for further monetary support remains high, captured the sentiment while speaking to reporters this week.
"In some respects the market has been doing the job for the Federal Reserve of suppressing the longer-term rates," he said.
But a growing chorus of economists, both within and outside the Fed, say the central bank cannot sit idly by with the U.S. unemployment rate still at an elevated 8.2 percent - and showing few hints of falling.
They argue for an extension of Twist if not a further expansion of the Fed's balance sheet through bond purchases, a policy known as quantitative easing.
"It's not about lowering the long-term rate it's about getting people to believe in growth," said Michael Dueker, a former St. Louis Fed economist now at Russell Investments.
Part of the idea is to get businesses to spend some of the cash they are sitting on by giving them confidence in the recovery. That in turn should bolster employment, and make Americans more comfortable about their finances.
"It's a signal from the Fed that they're not going to let the economy stagnate," said Dueker.
The Fed, which meets on June 19-20, has held overnight interest rates near zero since December 2008 and has bought $2.3 trillion in securities in two separate bouts of quantitative easing, or QE.
It then launched a $400 billion Operation Twist. The Bank for International Settlements estimated in March the policy would have a similar effect on 10-year Treasury yields as the second round of QE, potentially lowering them by about 0.85 percentage point.
Rates on the benchmark 10-year Treasury slumped to a record low of 1.442 percent on June 1, after the weak May payrolls data. Mortgage rates are also at their lowest ever, with a 30-year fixed mortgage available for under 4 percent.
Economists polled by Reuters last week saw a 42.5 percent chance the Fed would extend Twist in June, and a 45 percent chance it would eventually embark on more QE.
In his testimony, Bernanke said the Fed was poised to shield the economy if financial woes mounted but he offered no clear signal on whether officials would act next week.
Elections in Greece this weekend could be a major factor if they suggest the country is headed toward a euro zone exit, an outcome that could cause financial market chaos and an aggressive Fed response.
Christina Romer, a former adviser to President Barack Obama, made the case for additional Fed help in a New York Times column on Monday entitled "It's time for the Fed to step up."
The U.S. economy grew at only a 1.9 percent annual rate in the first quarter and appears to be expanding no more swiftly now, raising concerns that the recovery could sputter. At the same time, U.S. employers added just 69,000 new workers to their payrolls in May, too few to curb the unemployment rate.
Inflation has remained near the Fed's 2 percent target, making more stimulus a bit harder to justify. Yet for Romer, the argument for doing more is clear cut.
"The Fed's dual mandate doesn't say it should care about unemployment only so long as inflation is at or below the target," the Berkeley economist wrote. "It's supposed to care about both equally. If inflation is at the target and unemployment is way above, it's sensible to risk a little inflation to bring down unemployment."
If Bernanke and his colleagues do decide to act - and the institution's influential vice chair, Janet Yellen, has suggested they might - then extending Operation Twist could be the path of least resistance.
Fed officials know their ammunition is already somewhat depleted. With that in mind, some would like to save a possible third round of bond purchases - QE3 - for more drastic threats like a full-blown financial crisis or a return to recession. That makes Twist seem like a palatable near-term option.
However, the scope for more Twist is limited by the Fed's remaining holdings of eligible short-term securities, which Macroeconomic Advisers economist and former Fed Governor Laurence Meyer estimates at roughly $160 billion.
The second round of Twist could take many forms, and may extend to the mortgage-bond market, which the Fed targeted during its first round of bond buys in an attempt to revive a moribund housing sector.
And it could well be accompanied by an indication that rates are likely to stay near zero for even longer than previously thought.
"We continue to look for the Fed to push back its rate guidance, and believe there is slightly better than even odds the (policy-setting) committee will extend Operation Twist," said Michael Feroli, an economist at JP Morgan.
(Additional reporting by Jonathan Spicer; editing by William Schomberg and Christopher Wilson)