While economic indicators are looking up, the drag of high gas prices and continuing fragility in the economy are keeping Federal Reserve Chairman Ben Bernanke's foot firmly on the monetary policy accelerator.
At its meeting today, the Federal Open Market Committee elected to keep the federal funds rate near zero in a continuing bid to stimulate the economy, but it stopped short of announcing a new monetary stimulus.
The biggest news from the meeting may be the Fed's decision to leave its time frame for raising rates untouched. At its January meeting, the FOMC projected it would hold off on raising interest rates substantially until late 2014.
Since then, favorable economic numbers on U.S. unemployment and production along with rising energy prices have led to questions about whether the Fed would keep that projection unchanged. At this meeting at least, it appears the Fed didn't seriously consider changing its interest rate plans.
"The committee decided today to keep the target range for the federal funds rate at zero (percent) to 0.25 percent and currently anticipates that economic conditions -- including low rates of resource utilization and a subdued outlook for inflation over the medium run -- are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014," the Federal Reserve said in a statement.
The Fed took note of the recent rise in oil prices, saying it will "push up inflation temporarily." But those urging the Fed to swoop in and fix energy price spikes are likely to be disappointed, says Jerry Webman, chief economist at OppenheimerFunds.
"Monetary policy can't do anything about the weather, and it can't do anything in the short term about energy prices," Webman says.
Bernanke has been clear in the past that there's little the Fed can or will do to fight high gas prices, other than take careful measures to ensure it's not making the problem worse, Webman says.
"Energy prices going up aren't inflationary unless the Fed keeps pumping money into the economy to give people plenty of money to go buy more expensive gasoline. If you're not seeing big expansions in money, if they're careful about controlling the money supply, then energy prices tend to have the opposite effect. They tend to slow the economy down," Webman says.
Looking at the overall economic picture, even with recent good news, any discussion of raising interest rates is premature, says Jim Wilcox, Lowrey professor of business at the University of California Berkeley's Haas School of Business.
"I think that (the Fed's) timetable was built with approximately this economic performance in mind," Wilcox says. "What we've had is very modest improvement of the sort we hoped at a minimum to get, and so I don't think it really speeds up the timetable at all. Even if we get several months of considerably improved economic performance, there's just still so much slack in this economy."
Another Fed action that was conspicuously absent from the FOMC statement was new quantitative easing, the practice of buying mortgage-backed securities, Treasuries and other types of securities in the open market in an attempt to drive down interest rates and stimulate the economy.
"The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction," the FOMC said in its statement. "The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability."
Should the recovery fail to accelerate or suffer another slowdown, Wilcox says he would expect further Fed action.
"I wouldn't be surprised if before too long, they try to launch some additional version of a QE," he says.
Indeed, The Wall Street Journal reported last week the central bank was considering "sterilized" QE.
Designed to push down interest rates on some types of securities without risking higher inflation, sterilized QE differs from conventional QE in that the central bank would borrow a dollar for every dollar's worth of securities it buys, in order to avoid increasing the money supply in the broader economy, Webman says.
"The idea is to deal with what they perceive to be a problem in some part of the asset market, and 'sterilization' means they want to do it without putting more money into the system," Webman says.