By Holden Lewis • Bankrate.com

With consumer prices rising on one side, and with house prices falling on the other side, the Federal Reserve stood still in the middle -- like the pivot point of a teeter-totter.

The central bank left short-term interest rates alone today. The target federal funds rate, which is what member banks charge each other for overnight loans, remains 5.25 percent. The prime rate remains 8.25 percent.

The central bank commented on the two issues that worry it most: problems in the housing market and consumer inflation.

"Recent indicators have been mixed and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters," the Fed said.

"Recent readings on core inflation have been somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures."

What the Fed could affect
Some kinds of consumer loans, such as those for variable-rate credit cards and home equity lines of credit, have interest rates that move up and down with the prime rate. Other forms of consumer debt, such as mortgages and auto loans, aren't indexed to the prime rate, and move up and down in response to market forces.

If you visualize the Fed's rate policy as being the pivot of a playground teeter-totter, you can see what sort of bind the central bank is in. Moving the pivot point in either direction could break the teeter-totter:

• If the Fed were to raise rates to push overall inflation down, house prices probably would fall more -- and if there's one sure way to anger homeowners, it's to threaten property values. According to the National Association of Realtors, half of the houses resold in January cost less than $210,600. A year earlier, half of the houses resold cost less than $217,400. That's a 3.1 percent drop in the median price in a year.
• If the Fed were to cut short-term interest rates, house prices might stop falling eventually, but prices for other things would rise even faster than they've been going up. In the 12 months ending in February, the consumer price index went up 2.4 percent, well above what is believed to be the Fed's target range of 1 percent to 2 percent. When you exclude food and energy, consumer prices rose 2.7 percent in the 12 months ending in February.

Fed in a bind
As you can see, the Fed is in a bind. Inflation has remained stubbornly above the central bank's target zone. Because of inflation, the central bank has signaled for months that its next move is more likely to be a rate increase than a decrease. Yet investors and pundits have been clamoring for a rate cut, which could exacerbate inflation.

"I think they're trying to sort things out," says Dean Baker, economist and co-director of the Center for Economic Policy and Research. "They have to be worried about the fallout from the housing market, even if they don't say that."

The Fed's rate-setting Open Market Committee meets eight times a year. The last time the panel met, on the last day of January, it left rates alone and said somewhat hopefully that "tentative signs of stabilization have appeared in the housing market." Real estate led the long, slow recovery from the 2001 recession, so the Fed welcomes renewed signs of vigor from the housing sector.

Mixed economic signals
Since the Fed spotted those tentative signs of stabilization in housing a month and a half ago, the news has been mixed -- new home sales plunged in January compared to the previous month, while home resales rose modestly. Median prices were down for both new and existing homes. Meanwhile, new jobs were created in January at the expected level of 97,000 -- not terribly encouraging, but not especially bad, either.

The Fed raised the target federal funds rate 17 times in a row, a quarter-point each time, from June 2004 to June 2006. It has held short-term rates steady since then.

The Fed controls the federal funds rate indirectly, by selling and buying securities to add and subtract cash from the banking system. The prime rate is 3 percentage points higher, and moves up and down with the federal funds rate.