Divided Fed Presents United Front
NEW YORK (TheStreet) -- The Federal Reserve sent a mixed message to the markets on Wednesday, revealing a more hawkish view of the economy, yet continuing to show a bias towards a highly accommodative monetary policy.
In its monthly policy statement , the Fed stood pat on interest rates and said it continues to expect the economy to grow at a moderate pace in the coming quarters and then pick up gradually. It also noted a rise in inflation, but stuck to its assessment that long-term inflation expectations were stable.
The Fed's economic projections, however, did have more pronounced differences to its earlier estimates. The central bank raised its forecast for GDP growth in 2012 to a range of 2.4-to-2.9%, up from its January estimate of 2.2-to-2.7%.
The outlook for the job market was also more optimistic with the estimate for the unemployment rate dropping to a range of 7.8%-to-8% in 2012 from a prior view of 8.2%-to-8.5%.Meanwhile, core PCE inflation rate projections for 2012 rose to 1.8% to 2%, close to the Fed's inflation mandate. Changes to the forecasts for the outer years, especially out into 2014, were relatively muted. But interestingly, only 4 members of the Federal Open Market Committee expect interest rates to remain at current levels by the end of 2014. Six members expect rate hikes in 2012 and 2013, while 7 members judged that the rate will rise in 2014, up from 5 earlier. The breakdown of the monetary policy outlook seems to suggest that some of the more dovish members of the committee were starting to pull back from their view that the economy was in need of more easing. Which makes the Fed's continued accommodative stance all the more confusing. If more members of the Fed see the need to tighten monetary policy before 2014, how is it that the FOMC stuck with its pledge to keep interest rates "exceptionally low" at least through 2014? Then Chairman Ben Bernanke went ahead in his quarterly press conference and said that the Fed remains committed to doing more, "should the economy need additional support," leaving the potential for more quantitative easing, or QE3, on the table.
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