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.

He also explained that the projections made by individual members of the FOMC represented a "range of views" that were "inputs into the committee process".

The FOMC has 17 members who all make projections, but only 10 vote in the monthly meetings on rate-setting decisions.

"That's very convenient for Mr. Bernanke right now, given that 13 of the 17 members expect at least some increase in rates before end-14, but four of the most hawkish -- Messrs. Plosser, Kocherlakota, Bullard and Fisher have no vote this year," wrote Ian Shepherdson, chief U.S. economist at High Frequency Economics, in a report following the press conference.

"We believe that the Fed will not be able to keep rates on hold until late 2014 and that it is more likely that rates will be hiked in 2013," economists at RDQ Economics wrote, noting the changes in the forecasts for the timing of the rate increase.

While the question of additional quantitative easing remains murky, the Fed Chairman was able to share his thoughts on the recent slowdown in the job creation.

Bernanke said the unusually warm weather may have made "January and February artificially strong and March artificially weak."

The FOMC also discussed at length the decline in the labor participation rate, Bernanke said. The committee believed that the leveling out of the participation rate of women, which had been on the rise, was one reason for the decline.

Young people choosing to stay in school during the recession was another reason why the labor participation rate was below average.

Bernanke also said that the Fed, while remaining highly accommodative, was reluctant to allow inflation to rise above 2% levels consistent with its mandate just to boost employment.

"Does it make sense to seek a higher inflation rate to increase the pace of reduction in the unemployment rate? The view of the committee is that it will be reckless," Bernanke said.

"We have spent 30 years building for low and stable inflation, which has proved extremely valuable, in that we've been able to take strong accommodative actions in the last four or five years to support the economy ... To risk that asset for tentative or doubtful gains on the real side will be an unwise thing to do."

-- Written by Shanthi Bharatwaj in New York.

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