Decision makers at the U.S. Federal Reserve Board find themselves with their hands tied as they prepare to release their latest rate statement tomorrow.

The economy isn't strong enough for the Fed to begin withdrawing stimulus, through shrinking its balance sheet or raising its benchmark rate, which is at virtually zero. The reality is consumers are opting to pay down debt instead of spending on goods; private-sector job creation is advancing at a snail's pace; and inflation poses no immediate threat.

But nor is the economy weak enough to contemplate another round of liquidity injections, or so-called quantitative easing, as recent key economic indicators have been stronger than anticipated and reduced the odds of a much-feared double-dip recession.

"The recovery may be slower than many would like, but as Mark Twain wrote, 'continuous improvement is better than delayed perfection,' " wrote economists at Toronto-Dominion Bank in their quarterly U.S. outlook.

The Fed statement tomorrow is not expected to break new ground from August, when it acknowledged the recovery's pace was slowing and would be more moderate than previously anticipated. But the Aug. 10 statement ignited expectations for further easing through "QE II," (quantitative easing part two) when it announced it would take proceeds from maturing debt (up to US$190-billion over the next 12 months) and reinvest them in U.S. treasuries.

But some recent key U.S. data -- monthly job figures, the key manufacturing index and retail sales--surprised marginally to the upside, a welcome development in an environment of beaten-down expectations.

"Our economists believe that the improved data will likely result in the Fed sitting on the sidelines at [tomorrow's] meeting and if the outlook does not evolve to the Fed's liking, the November meeting may provide a better backdrop for a change in policy," said a report from analysts at Barclays Capital. "Investors looking for further intervention are likely to be disappointed by the Fed statement."

James Marple, senior economist at TD, said any change in the Fed's statement from August would be on the margins.

"People will be looking for any hint that the Fed's orientation has changed at all toward more asset purchases and further expanding its balance sheet," he said. "Maybe we won't see anything, but if there's any subtle change, or even more of a focus on the downside risk, that's what markets will be reacting to."

Sticking pretty close to the August language appears to be a safe strategy for the Fed, whose key policymakers are deeply divided on the question of further liquidity for the economy. Press reports suggested seven of the 17 Fed officials responsible for rate decision expressed reservations about, or outright disagreed with, the decision to reinvest proceeds from maturing debt into Treasuries.

"If there was only a small majority in favour of preventing the Fed's balance sheet from shrinking at a rapidly pace, there would seem to be little prospect now of the [Fed] agreeing on an actual expansion of that balance sheet, at least not unless economic conditions deteriorated markedly," said Paul Ashworth, senior economist at Capital Economics.

He said enough U.S. data has come through to "firm up" his firm's U.S. growth projection to 3% annualized in the third quarter, as net trade is expected to add to growth on the basis of a drop in imports.

If the Fed decides to embark on an another round of asset purchases -- of U.S. Treasuries and the like -- that won't happen until its November meeting or early in 2011, after the mid-term Congressional elections.

But there's a debate as to whether another round of quantitative easing -- which is designed to lower borrowing costs, especially at the long end--would do much to boost labour market prospects.

"Borrowing costs are already low, and any incremental reduction in interest rates will likely do little to promote economic activity," said Ray Stone, co-founder and partner of Stone & McCarthy Research Associates, an economics research firm in Princeton, N.J. "That said, the chairman, Ben Bernanke, seems hell-bent on doing whatever can be done to lower unemployment."