ByJON HILSENRATH

http://online.wsj.com/article/SB10001424053111904491704576575130596765932.html

Federal Reserve officials, worried that a wobbly economy and their fractious debates are confusing the public, are examining whether to adopt more explicit economic targets to clarify their strategy for lowering unemployment without fueling inflation.

Close.Fed Chairman Ben Bernanke has asked Philadelphia Fed President Charles Plosser and Chicago Fed President Charles Evans, two intellectual adversaries, to work with Vice Chairwoman Janet Yellen on how the Fed can better explain its economic goals to the public. One issue high on the agenda: Detail what changes in unemployment and inflation it would take to make the central bank veer from its low interest-rate policy, according to people familiar with the matter.

Fed officials are likely to consider other steps they might take to boost the ailing economy in the short-run when they meet Tuesday and Wednesday, including altering the composition of the Fed's portfolio of securities so that it holds more long-term debt. The idea would be to push down long-term interest rates to stimulate more investment and spending. They also could try to encourage lending by cutting the 0.25% interest rate currently paid to private banks when they park money at the central bank.

Mr. Bernanke holds enough sway to win backing for those actions, if he wants. But the issue about clarifying goals is unlikely to be resolved at this week's meetings, if at all, because of the wide range of views at the Fed about how to proceed.

Today, several of the Fed's 12 regional bank presidents are against trying new steps to spur growth. Three dissented at their last policy meeting. Other Fed officials are just as convinced more aggressive action is needed right away.

Some experts say the cacophony itself could be undermining the Fed's efforts to help the economy by making the public less sure about when it will do next. More explicit economic targets could be a way to clarify how the Fed will react and reassure the public and markets.

"I'm certainly worried that more than one message is being simultaneously sent by different people," said Michael Woodford, a monetary economist at Columbia University. He said the mixed signals have confused the public about the Fed's commitment to keep interest rates low, reducing the impact of its policies. "If I were in the institution, I would be concerned about that."

In normal times, the Fed announces interest-rate changes and markets respond in predictable ways. But these aren't normal times. The Fed has been holding its target for short-term rates near zero since December 2008. It can't move it much lower.

At such times, Mr. Bernanke has observed repeatedly, clear Fed communication about the economy and the path of interest rates becomes a crucial tool of monetary policy because they shape the expectations and behavior of investors, businesses and households. By giving clearer guidance about how long it could take to raise short-term interest rates, for instance, it might bring long-term interest rates down now.

Fed officials have already taken steps to sharpen their message. In August, Mr. Bernanke tried to make the Fed's intentions clear with a public declaration that short-term interest rates were likely to stay near zero at least through mid-2013. And Mr. Bernanke now conducts press conferences four times a year, giving him a bigger megaphone and more chances to explain the Fed's actions.

The next steps in the evolving communications agenda could involve explicit guidance to the public on what it would take for the Fed to change its stance. The central bank has made no secret that it wants inflation near 2%. (It's now running at a 3.8% annual rate, but is expected to slow in the coming months.) But it's been less clear about how much inflation or unemployment would have to change before the Fed would consider raising interest rates.

Mr. Evans and Mr. Plosser are emblematic of the forces pulling at Mr. Bernanke. Both are economists and occasional golf partners, but they see the world very differently. Mr. Evans worries that unemployment, now at 9.1%, is too high and sees no threat of inflation; Mr. Plosser worries that the Fed's actions will set off higher inflation in the future.

Mr. Evans, citing Mr. Woodford, said in a recent interview that hard-line talk from some corners of the Fed is blunting its efforts to help the economy. "Some people might believe we are closer to [raising interest rates] than in fact I think we will be," he said. He has become more outspoken recently making his case. He and other Fed officials interviewed for this article spoke before the central bank's pre-meeting media blackout started last Tuesday.

Mr. Evans wants the Fed to set triggers for policy by promising to keep short-term interest rates near zero until the unemployment rate moves below 7.5%, and as long as inflation doesn't top 3%.

Mr. Plosser—one of three who voted against the Fed's August decisions—wants the Fed to adopt a formal, numerical inflation target. He said the idea of broad triggers has potential but the Fed can't just "plop down" unemployment numbers that would trigger rate hikes without more study.

Mr. Evans said that he has seen no need to dissent, though he doesn't seem to rule it out. "I haven't found it necessary to think about that," he said. "I've been able to express my views and work within the committee consensus. I have every hope that that will continue to be the case."

Mr. Bernanke and many other officials dismiss the idea that he's confronting a rebellion inside the Fed. They argue that internal disagreement is a sign of strength because it shows officials are wrestling earnestly with hard questions and have their eyes wide open to the challenges they face. "My attitude has always been: if two people always agree, one of them is redundant," Mr. Bernanke said earlier this month in Minneapolis.

With Mr. Bernanke's encouragement, vigorous internal debates have become common even before official closed-door Fed meetings begin. In the 1990s, many Fed officials walked into meetings not knowing where then-Fed chairman Alan Greenspan stood.

Now, the days before meetings involve sometimes-intense jockeying. Fed staffers circulate memos detailing three or sometimes four different options to be discussed. One inside joke is that the middle option is the one favored by the chairman. Officials chime in, sometimes in detailed emails, to shape the options and the words the Fed uses to describe its plans before discussions officially start, according to people familiar with the process.

Mr. Bernanke's open style has helped him maintain deep respect even among those Fed officials who strongly disagree with him. "He's listened carefully to what I say," said Richard Fisher, president of the Dallas Fed, who dissented in August.

No one is thinking of resigning abruptly, as has occurred twice at the European Central Bank in the past year. Instead, the Fed is looking increasingly like the Bank of England, where officials frequently disagree and majority votes rule.

"It is not about a mutiny," Mr. Plosser said. "It should...be reassuring and not troubling that we have the same sorts of debates that people write about in the newspaper and blogs and in commentaries."

Mr. Plosser called Mr. Bernanke a few days after the contentious August meeting to express his support for the chairman's leadership, according to people familiar with the matter. Mr. Plosser had been surprised that the two other dissenters from the meeting, Mr. Fisher and Narayana Kocherlakota of the Minneapolis Fed, had been quoted in this newspaper expressing support for Mr. Bernanke, and Mr. Plosser wanted the Fed chairman to know he felt the same way.

A few days later, at the Fed's annual retreat in Jackson Hole, Wyo., Mr. Bernanke wandered up to Mr. Plosser and his wife during a western barbeque dinner and asked to join them.

Mr. Fisher said he calls Mr. Bernanke a few days before every official Fed meeting to brief the chairman on what he's hearing from executives in the Southwest. "He always takes the call or calls right back," said Mr. Fisher. "My wife doesn't return a phone call as fast."

The Fed chairman has had other challenges. Among them, the ranks of exhausted senior staff at the Fed board in Washington have been depleted, with the Fed's top economist, top international expert and top monetary policy expert all retiring in the past year. Donald Kohn, the Fed's vice chairman who was known for his ability to bridge internal divides, retired as well, leaving Mr. Bernanke short of a key internal conciliator.

For most of his tenure, Mr. Bernanke has counted on backing from Fed governors in Washington in confrontations with some of the regional Fed bank presidents. But two of the seven seats on the Fed board in Washington are vacant, and President Barack Obama has yet to nominate anyone to fill them.

But he has gotten one break. Thomas Hoenig, president of the Federal Reserve Bank of Kansas City and a long-time opponent of Mr. Bernanke's policies, retires Oct. 1. His successor Esther George, formerly the number two official at the Kansas City bank, is widely respected within the Fed as a tough bank regulator, but hasn't taken strong positions on economic policy.