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Better Economy Puts Bernanke in a Bind

NEW YORK ( TheStreet) -- A slowly improving economy can be just as much a conundrum as a faltering one for the Federal Reserve .

Even as the central bank chooses to stay its course on current monetary policy, the language of its latest committee report indicates that the Fed has entered heightened standby mode.

"The unemployment rate has declined notably in recent months but remains elevated... household spending and business fixed investment have continued to advance. The housing sector remains depressed... Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook," says the Federal Open Market Committee statement, released March 13.

The Fed tempers three encouraging observations with three warnings, thereby allowing themselves maximum leeway if the economy warrants stimulus down the road. To that same purpose, the bank says inflation shouldn't be a concern in the long run. While acknowledging that rising oil prices will push up inflation in the near term, it writes that "subsequently inflation will run at or below the rate it judges most consistent with its dual mandate."

Economists say that what may especially be tripping up the Fed are signs from the latest jobs and gross domestic product reports. As of February's unemployment report from the government, the economy has added more than 200,000 jobs for three months in a row, an upbeat sign for a central bank whose job is to push down the unemployment rate. However, economists don't get excited about long-term employment prospects unless consistent jobs creation comes hand in hand with broader economic growth. And so far, the latter is less than inspiring.

Research firm Macroeconomic Advisers forecasts that the economy will expand by 2.6% this year, with the pace slowing to 2.3% in the first half before picking up to 2.9% in the latter half. In comparison, 2011 saw a strong pattern of acceleration each quarter -- 0.4%, 1.3%, 1.8% then 3%.

Despite better economic data this year, forecasts have fallen compared to projections made in 2011. The Fed, too, has cut its 2012 forecast from last June to a range of 2.2% to 2.7%.

"The annual revisions to the national income and product accounts released last summer indicated that the recovery had been somewhat slower than previously estimated," said Fed chief Ben Bernanke in his semiannual speech before Congress in late February.

"In addition, fiscal and financial strains in Europe have weighed on financial conditions and global economic growth, and problems in U.S. housing and mortgage markets have continued to hold down not only construction and related industries, but also household wealth and confidence," he added.

Reasons why GDP projections are lower vary. According to Robert Johnson, economist with Morningstar, some economists say that trade balance got out of hand in January. "Export growth was still pretty good but imports went through the ceiling," he says. U.S. consumers can feel wealthier and more Americans can find jobs, but if their incomes go to goods made outside of the U.S., it doesn't bode well for our own GDP and employment figures, explains Johnson.