Fed Brings Inflation Debate to the Fore
NEW YORK ( TheStreet) -- The Federal Reserve is dancing carefully around its inflation expectations, saying that while inflation might rise temporarily, it will meet expectations in the long run.
The debate about the effects of the Fed's monetary action on inflation has come to the forefront as the central bank grapples with whether to pursue stimulus in an improving economic environment. In the Federal Open Market Committee announcement Tuesday, the central bank suggested that it wasn't concerned about runaway inflation. That left room to stimulate the economy later in the year if necessary.
In the report, the bank said that gas prices may push up inflation temporarily. Strains in global financial markets have eased, although they still pose significant downside risk, it also said.
Meanwhile, much of the latest announcement echoed the conclusions from the prior FOMC in January -- interest rates will be kept near zero through at least late 2014. The labor market has seen improvement, although the the unemployment rate remains elevated. And, repeating language from the last FOMC report, the Fed said "the economy has been expanding moderately."
The report was mostly in line with expectations. Stocks on Tuesday held steadily higher, with the Dow Jones Industrial Average making its way above 13,000 and the Nasdaq headed for its first close above 3000 in 12 years.
"Subsequent to the statement's release, equity markets rallied, bond markets declined modestly and gold continued to fall," said Dan Greenhaus, strategist with BTIG. "We find this a bit interesting because there was nothing in the statement that our initial read through found to be particularly market moving. Nearly every optimistic note was book-ended by a caveat."
Investors weren't expecting the Federal Reserve to announce a new stimulus given that the economy has shown signs of improvement, in particular in the labor market. The last three months has shown a pickup in the pace of job gains to more than 200,000 additions each month, although the unemployment rate remains uncomfortably high at 8.3%.
The Fed's mandate does not include targeting the pace of economic growth. However, a slower rise in GDP projected for the first quarter has raised questions as to whether the bank will come in with economic stimulus later in the year if economic growth continues to taper off.
The Fed's last program to help the economy, Operation Twist, wraps up in June, so many economists note that the Fed would probably wait to act until then. Even if the Fed introduces further stimulus, economists say it is unlikely to launch a full blown round of quantitative easing, given the criticism surrounding the last two rounds. Instead, the speculation is that the central bank may introduce what is known as sterilized bond buying, where the bank would buy long term mortgages and bonds but control inflation in the near term.