WALL STREET JOURNAL

Three months after launching an aggressive push to restart the lumbering U.S. economy, Federal Reserve officials are nearing a decision to continue those efforts into 2013 as the U.S. faces threats from the fiscal cliff at home and fragile economies elsewhere in the world.

The U.S. economy has been growing at a skimpy rate of around 2% for much of the year. While Fed officials have been encouraged by progress in the housing and banking recoveries, business uncertainty and hiring restraint are still holding back growth. And if President Barack Obama and lawmakers fail to reach an agreement before year-end, the fiscal cliff's roughly $500 billion in tax increases and spending cuts could kick in next year and throw the economy back into recession.

Central bank officials face critical decisions at their next policy meeting Dec. 11-12. The most pressing is whether to move forward with bond-buying programs in which the Fed is accumulating immense stockpiles of long-term mortgage-backed securities and Treasury bonds. The bond-purchase programs are meant to drive down borrowing costs, and in turn boost the prices of assets like stocks and homes, and stimulate hiring, spending and investment.

The Fed signaled strongly in September that it was inclined to sustain these programs and markets have anticipated some combination of bond purchases will continue next year. Several Fed policy makers have suggested in recent interviews and public speeches that they support more bond buying. At their meeting next month, officials will debate extending the programs and hear staff presentations on their impact.

The Fed has been experimenting with different bond-buying programs since late 2008. In all, it has accumulated $900 billion in mortgage securities and more than $1 trillion in long-term Treasury securities since then. Critics of these policies inside the Fed and out worry that the programs could cause inflation or asset bubbles.

Moreover, Fed officials acknowledge that the programs aren't as powerful as they were during the financial crisis. But they believe they are still helping the economy, especially housing, and the risks are manageable.

Fed Chairman Ben Bernanke said at his news conference in September that the central bank would review all its asset purchases at the end of the year, when one of the bond-buying programs expires.

Fed officials said in their statement after the September meeting that they would keep buying long-term bonds until the job market improves substantially. The unemployment rate has fallen since July, but not enough for many policy makers.

"I am not prepared to say we are remotely close to substantial improvement on the employment front," Atlanta Fed president Dennis Lockhart said in a speech this month. Mr. Bernanke echoed that view last week in an address to the New York Economic Club, in which he said unemployment is still "well above" where it would be in normal times.

Underscoring the Fed's dim view of the job market, the central bank said Wednesday in its pre-meeting beige book that its 12 regional banks reported "modest improvements in hiring activity" in recent weeks. There were some pockets of weakness in places such as Richmond, Va., and Cleveland, and some large employers moved toward part-time workers or postponed hiring until next year.

Since September the Fed has been buying $40 billion a month of mortgage-backed securities and looks set to continue that program. Officials believe the program has helped push down mortgage costs and spur a housing sector that is on the mend.

The more urgent issue is what to do with a $45 billion-a-month program known as Operation Twist, in which the central bank is buying long-term Treasury securities and funding the purchases with sales of short-term Treasurys. That program ends in December and many officials want to keep buying long-term Treasurys next year as a complement to the mortgage purchases.

"A decision not to continue buying long-term Treasurys when Twist expires would be a surprise to markets and that would be counterproductive," John Williams, president of the San Francisco Fed, said in an interview last week. "It would push long-term rates up and cause financial conditions to be a little less supportive of growth."

The Fed has run down its stockpile of the short-term Treasurys to sell to fund long-term purchases. To keep buying the long-term bonds it would need to fund the purchases by creating new bank reserves, which in effect is printing money. That is how the Fed has funded previous Treasury purchase programs and how it is funding the mortgage-bond buying. Though critics say this could be especially inflationary, many Fed officials believe they can manage the reserves without risking inflation.

It is possible that Fed officials might deviate in size from the $45 billion in monthly Treasury purchases—and $85 billion in all when mortgage securities are counted—but a big change from that amount looks unlikely. "The composition of the purchases, roughly 50-50 between (mortgages) and long-term Treasurys, is a good one," Mr. Williams said.

The central bank faces considerable uncertainty about the economic outlook. If the economy tumbles over the fiscal cliff and into recession, Mr. Bernanke has said there is little the Fed could do to offset such a shock.

Reading economic data in the weeks ahead could be doubly hard, because of distortions caused by Sandy, the superstorm that hit the mid-Atlantic in late October. Surging unemployment claims in recent weeks suggest the storm's effects could skew near-term measures of employment, growth and spending. Such variables could give the Fed added incentive to adopt a steady-as-she-goes approach on bond buying.

Central-bank officials want to see faster economic growth to sustain more improvement in the job market. Macroeconomic Advisers LLC, a forecasting firm, estimates the economy grew at a 2.9% pace in the third quarter, but has slowed to a pace of 1.4% in the fourth. The U.S. needs "a faster pace of growth than we have now," Charles Evans, president of the Chicago Fed, said in a speech this week.

Another issue for officials to consider at the December meeting is whether to alter their communications strategy. For several months, they have been debating whether to state explicitly what unemployment rates or inflation rates would get them to raise short-term interest rates from their very low levels. Such a move, they believe, could help reduce uncertainty about how long interest rates will remain low, thereby keeping long-term rates low.

Officials are making progress on this front. Vice Chairwoman Janet Yellen recently said she supported such a move. Mr. Evans this week altered his proposal on the matter to edge closer to others' visions for such thresholds.Mr. Evans said the Fed should assure the public it will keep short-term interest rates near zero as long as the unemployment rate is above 6.5% and inflation is projected to remain below 2.5%.

If the Fed is going to adopt such a move, it would make sense to do it either at the December meeting or in March, when Mr. Bernanke will hold news conferences and be able to explain the central bank's thinking on the complicated subject. But there could be lingering disagreements on what numbers to adopt and how to articulate the plan.